Evidence of Why the Volcker Rule Is a Non-Issue

  • JJ Hornblass
  • July 28, 2010
  • 0

President Obama pitched the Volcker Rule, which forbids banks from engaging in proprietary trading, as a big win for the administration. From my vantage point, it looks like it is a non-issue. Both Goldman Sachs and Citigroup are already well on their way to sidestepping the new rule, which was within Dodd-Frank.

Citigroup’s effort (courtesy of Bloomberg):
Citigroup Inc. may move a team of proprietary traders into its hedge-fund unit, one of at least three alternatives the U.S. bank is studying to comply with the Dodd-Frank Act, people briefed on the matter said.
Traders in the Citi Principal Strategies unit, led by Sutesh Sharma, would be reassigned to Citi Capital Advisors, which mostly oversees money for outside investors, said the people, speaking anonymously because the talks are preliminary. The bank would set up the traders as hedge-fund managers and seed their funds, then raise money from outside investors to redeem its stakes, the people said.
“This may be a way of keeping a high-margin capital- markets business in the fold, within the language of the law,” said David Hendler, a senior analyst at New York-based research firm CreditSights Inc. “They would be transforming it from an- interest-plus-capital-gain business into a fee business.” …
Under another scenario considered by Citigroup, members of the Principal Strategies team would be distributed across the bank’s main client-facing trading operations based on their specialties, the people said. For example, proprietary traders who specialize in stocks in specific industries would join the single-stock trading team, one of the people said.
And Goldman Sachs’s dance (courtesy of Fox News):
Goldman Sachs has figured out a novel approach to getting around the Volcker Rule’s restrictions on trading: it’s remaking its risk-taking traders into asset managers, and the rest of Wall Street may soon follow, FOX Business Network has learned.
The big Wall Street firm has moved about half of its “proprietary” stock-trading operations — which had made market bets using the firm’s own capital — into its asset management division, where these traders can talk to Goldman clients and then place their market bets.
The move is designed to exploit a loophole in the Volker Rule, part of the recently signed financial-reform legislation named after presidential economic adviser and former Federal Reserve chief Paul Volcker. The Volcker Rule is supposed to scale back on Wall Street risk taking by ending what’s known as proprietary trading, where firms use their own ideas and capital to make market bets.
But by having the traders work in asset management, where they will take market positions while dealing with clients, Goldman believes it can meet the rule’s mandates, avoid large-scale layoffs and preserve some of the same risk taking that has earned it enormous profits, people close to the firm say.
Goldman’s move also underscores the weakness in the Volcker Rule, which was designed to reduce the same type of risk-taking activities that led to the 2008 financial meltdown. Simply by labeling a trade “customer related” the firm can still make large market bets, and thus engage in some of the same risk taking the rule was designed to eliminate.
Good job, Paul.
The banks have until 2017 to comply with the Volcker Rule.
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JJ started the first iteration of Bank Innovation back in 2007, and has been working on it ever since. He also serves as President & Chief Executive Officer of Royal Media, Bank Innovation’s parent. He founded Royal in 1995 and oversees all aspects of the New York-based diversified media company. Prior to forming Royal, JJ was on the editorial staff of American Banker, the daily newspaper, and worked as an editor of a business magazine in Hong Kong. As a reporter and editor, he has won journalism awards from the National Press Foundation, Newsletter & Electronic Publishers Foundation, and the Reader’s Digest Foundation. He has a BS in Economics from Yeshiva University and a Master’s from the Columbia University Graduate School of Journalism. He was also a Fellow at the University of Wisconsin-Madison Graduate School of Banking. He lives in New York City with his wife, two daughters, and son. He counts among his accomplishments one New York City Marathon, two New York City Triathlons and the 2010 Father’s Day 5K, the first race he ever ran with his daughters. He can be reached at hornblass@gmail.com or 212-564-8972.

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