Holy Smokes! I understand the President felt under pressure to announce something about financial reform given what happened in Massachusetts but oh my gosh! “This new scheme- which covers a ban on proprietary trading, a ban on ownership, investment in or sponsorship of hedge funds, and private equity, and new limits on the overall size of banks is vague and will doubtless change before it becomes a reality.” (FT) The Financial Times says in a staff written editorial named “Obama declares war on Wall Street” that the timing was indeed political. Besides what happened in Massachusetts, Goldman announced their earnings and thus their bonuses which has been a lightning rod for the public’s anger and thus gave the President a ‘moment’ to make this aggressive announcement. According to the FT, who endorsed the new tax previously announced, this ‘radical shift a mistake.”
So what do I think? I don’t think they powers that be truly understand how Wall Street works, in particular as it relates to what is “proprietary trading.” It is one thing to say that firms can do it in the context of facilitating customer business but as someone who traded for 10 years, what is customer business is not easy to determine. Let me give you an example from my own experience.
I was a trader of mortgage backed bonds. I carried positions to enable customer activities and oppositely ran short positions to hedge my book. I would accumulate positions in bonds I thought were good value based on research and my own opinions so when customers agreed and wanted to buy them I could offer them competitively. It was very important to ‘do the business’ but it was also important to ‘make money.’ Proprietary trading is what enables you to do both. YES, there is a downside to prop trading and the government should not ‘bail out’ risk takers, but this rule shoots the baby out with the bathwater. Without ‘prop trading’ I do not see how Wall Street firms can do their business.
As for the ownership of private equity and hedge funds I think this issue is complicated as well and not as simple as just now sorry, you cannot do it. Again, financial reform is needed, but thoughtful reform.
What I take biggest issue with frankly is the language and the tone the administration is using. You can be strong without being aggressive and confrontational. Wall Street played by the rules by and large and yes the rules were messed up but blame the regulators for that one. President Obama daring Wall Street to challenge what they are doing is just not appropriate in my book and clearly populist.
Lastly if you really want to get annoyed and ponder what happens if the government takes financial institutions continue to follow what is happening with Fannie and Freddie.
Here is the latest from the Wall Street Journal. (Fannie, Freddie Losses May Hit US)
"New Bank Rules Sink Stocks" - WSJ Jan 22
"Obama Hammers the Banks" - FT Jan 22
"Obama Declares War on Wall Street" - OPED FT Jan 22