Sparky Obama Sends US Banks Overseas in Well Conceived Scheme:
Excerpt from previously posted article: ...Back in the UK, at the Treasury and in Downing Street, officials gathered to watch Obama's address. There had been no forewarning from Washington of any big news, so nothing significant was expected.
The mood soon changed. Press officers were dispatched with holding statements as the Government tried to work out its position. The Conservatives and Liberal Democrats jumped on Obama's plan as evidence that their earlier calls for a separation of risky prop trading activities would now be borne out. Bankers, meanwhile, hung their heads in their hands. "It's the writing on the wall," one said. "We're all being sent back to the Dark Ages, for sure."
As the dust settled, analysts were not so sure. Frederick Cannon, at Keefe, Bruyette & Woods, said: "We believe the timing of the announcement and the lack of detail are indications that the administration's proposal is more of a political statement than a serious legislative proposal."
At UBS, Philip Finch asked: "The proposal has raised a number of questions making it difficult to assess at this stage. How is proprietary trading defined? Does it include taking positions in client flows? What is the likely market-share cap on non-deposit funding? Will all banks be affected? Can bank holding companies opt out?"
Without the answers to Finch's questions, the pledge is meaningless political rhetoric. If the rule is that banks in the US are not allowed US prop desks, they will simply move them overseas – a relatively easy process as prop desks have no clients. In theory, pushing the trading under the auspices of other regulators could increase risk.
If the rule is that US incorporated banks cannot operate any prop desks anywhere in the world, then many will relocate to more favourable locations – including London.
It was a point not lost on Lord Myners, City minister. "Three weeks ago I was answering questions about the UK being an unattractive place to operate," he said in reference to the 50pc tax on bonuses. "Now it's the opposite and we're being accused of being too timid."
Just days after the announcement, Obama is already looking isolated. "The argument is that hedge funds, private equity and proprietary trading are a source of risk – that is not our general view," Myners said. "In the UK, the three activities were not responsible for RBS, HBOS or Northern Rock, who, on the whole, failed in the rather classic way of making bad loans.
"We certainly don't want to crack down on hedge funds and private equity, and prop trading is best handled through capital and leverage controls." Even the Conservatives, who initially applauded the Volcker rule, soon retreated to the safety of calling for international co-operation.
In France, Christine Lagarde, finance minister, welcomed the proposals a "very, very good step forward" but was only supportive of the fact that finally "they see that regulation, which was a taboo word difficult to use in financial circles in the US, is vital to contain ... banking excesses".
For analysts at Credit Suisse, the "Volcker Rule" is the start of a new round of beggar-thy-neighbour regulatory arbitrage. "In previous episodes of US re-regulation, the reaction of European governments has not been to duplicate the US but to take advantage of it by allowing US banks to use the euromarkets to carry out business that would not be possible under (US) domestic regulation," they wrote.
For all its bad publicity, prop trading serves the vital function of providing liquidity to markets. Large corporates often need their bank to buy assets. In an underwritten rights issue, for example, banks pledge to take the company's shares at the issue price, ensuring the business raises its money and grows.
On other occasions, clients may need to sell an asset to their bank when there is no other buyer available. The bank will hold it and offload it at a future date. It's all part of the client service. In its 2008 annual report, Barclays revealed that the bank held £54.5bn on its own accounts related to trading portfolio assets. Such operations are prop trading because they involve the bank taking a principal risk, but client-facing, which it appears will be allowed under the Volcker Rule. However, even Volcker himself has said the lines are "cloudy at the border".
Lord Turner, along with most bankers, prefers the use of capital and liquidity requirements to change behaviour. Demanding banks hold large amounts of capital and liquidity will make it too expensive to operate a prop desk. Unveiling his proposals last year, Lord Turner said he and Volcker were not that far apart – it's just that he'd rather the banks draw the line. If someone could show him where to split a bank in two, he even added, he would do so without hesitation.
It is all about the line. At one extreme, if all prop trading is deemed "for [banks'] own profit, unrelated to serving their customers", "it will have profound implications for markets", the Magic Circle lawyer said. "If you remove banking as a facilitation function, you push market trading back 50 years."
...Uncertainty alone wiped billions off UK bank share prices on Friday.
The Volcker Rule may have further unintended consequences for hedge funds and private equity...
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