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Australia: Obama's bank ban could rock Australian markets

Obama's bank ban makes local waves

By Alan Kohler
Posted 2 hours 52 minutes ago
Updated 2 hours 43 minutes ago

US companies such as Goldman Sachs and JP Morgan are set to demonstrate their recoveries from the credit crash, with a 60 percent increase in bonuses compared to last year.

Necessity being the mother of invention, the Democrats' loss of the Massachusetts by-election necessitated the invention of something dramatic. So it was that President Obama announced a series of measures last week aimed at curbing the risk-taking bankers of Wall Street.

It's not the "Yes, we can" inspirational message on which he was elected, but "No, they can't" ... trade on their own account, own hedge funds or get too big.

Whether the ban will prevent another global financial crisis, or even work at all, is less important at this stage than the announcement of tough action. It was duly reported as Obama's War on Wall Street, and the US sharemarket took a gratifying tumble, but it's no more than a start and it certainly won't stop another GFC.

In Australia, meanwhile, stockbrokers are agog. Five of the top 10 investment banks here are owned by US institutions that would be caught by the proposed new rules and therefore banned from proprietary trading and operating hedge funds.

And I'm told that up to a third of the volume of trading on the ASX each day is proprietary trading by these banks, as well as the other five operators.

So if the Obama ban on prop trading is effective and its long arms reach across the Pacific, it will have a big impact here.

Such a restriction on US banks operating in Australia could both dramatically reduce ASX volumes and liquidity and give a big free kick to the European and locally-owned investment banks, such as Macquarie, UBS, Deutsche Bank, RBS and Credit Suisse - as long as their own governments ignore President Obama's call for them to follow suit. At this stage they are all saying: "We'll pass, thanks very much - not for us".

The Australian Government has not commented, but such a move here is very unlikely.

No one knows yet whether the US ban will apply to the Australian branches of US banks. American laws don't apply outside the US of course, but it's possible that if a US bank is banned from doing something, then it can't do it anywhere. That already happens with other US regulations and laws - the organizations affected often voluntarily apply it to their global operations, in addition to obeying local rules.

Whether that's what happens this time will depend on how the law is worded. If it only bans pure prop trading, as it's called, while allowing firms to "make markets" for their clients then the locals are likely to obey and withdraw from the market.

Prop trading is a big part of all markets and has contributed hugely to the profitability of banks and investment banks, but it's also used by investment banks to make markets for their clients - buying shares directly when market liquidity is insufficient, with the intention of selling them later.

If an Australian investment bank couldn't do that, it would be at a big competitive disadvantage and would lose market share.

President Obama has said that won't be banned, but bankers are waiting to see the wording of the law before relaxing on that score.

Whether prop trading by deposit-taking banks contributed to the GFC is another matter.

Lehmann Brothers, whose collapse in September 2008 triggered the worst of the crisis, would not have been caught by the new Obama rules because it was not a deposit-taking bank, although it was a big prop trader.

The bank losses in both the US and Europe that contributed to the crisis were caused by bad lending.

In fact there was much more to the GFC than this sort of risk-taking by banks: the credit bubble was fostered by the US Federal Reserve Board's loose monetary policy, the Chinese trade surpluses that were recycled in US bonds, and by the excessive debt-fund consumption of Americans and the rest of the Anglo world for that matter).

The banks just did what you expect when confronted with cheap debt, supplied by the Fed and China - they borrowed lots of it and turned a profit with it.

The banks and those lending to them took the risks they did because they believed they would not be allowed to fail, and it turns out they were right: the big US banks have been bailed out to the point of nearly bankrupting the state, because to not do so was unthinkable - they were too big to fail.

And the only way seriously to address the problem of excessive risk-taking by banks is to find a way to allow them to fail, or to charge them for the privilege of being, in effect, insured.

http://www.abc.net.au/news/stories/2010/01/25/2800147.htm?site=thedrum