I’m sympathetic to Matt Taibbi’s argument that Wall Street made out like bandits in the Dodd-Frank financial reform law. I’ve tried to explain as honestly as I possibly could how the law isn’t a root-and-branch restructuring of the financial sector, and how it isn’t even a law yet, with all the studies and rulemaking to come. Taibbi’s article does the best job I’ve seen of explaining the inside story of the “de minimis” exemption to the Volcker rule, the one that allows banks to invest up to 3% of Tier one capital in hedge funds or other high-risk trades. And nobody will argue that it was a terrible gutting of a promising rule. Overall, he makes an expert case about the true nature of the law, and how it portends another financial crisis.
However, this move from Goldman Sachs to disband their prop trading desk is certainly interesting and unexpected.
They are the elite among the elite at Goldman Sachs, highfliers who are the envy of Wall Street.
But on Washington’s orders, Goldman is now considering a step that once would have been unthinkable: disbanding the corps of market wizards at the heart of its lucrative trading operation.
Under the new Dodd-Frank financial regulations, Goldman must break up its principal strategies group, the wildly successful trading unit that has helped power the bank’s profits. Goldman is considering several options, including moving the traders to another division or shutting the unit altogether, according to people briefed on the matter.
Across Wall Street, other financial giants are also embarking on the delicate task of complying with the new rules governing their trading and investments.
Morgan Stanley is considering ceding control of its $7 billion hedge fund firm, FrontPoint Partners. At Citigroup, executives have sold hedge fund and private equity businesses and are now discussing paring back proprietary trading, which relies on a bank’s own capital to make bets in the financial markets.
Will these be fundamental changes? Maybe, maybe not. They may just shift these risky corners of the business into darker swamps that won’t get the attention of the men in green eyeshades. But if you read Taibbi’s article, you wouldn’t think that any of this had to happen, that Wall Street could keep on keeping on without a single change to their reporting structure. But this actually does look like real changes to the business model. If Goldman, for example, has to bring in private investors to support their trading division, it increases accountability on them and lowers the revenue potential of the division, which right now accounts for 10% of the total. What’s more, if the regulators follow the law, those investors would not be able to get a bailout from Goldman; they’d be on their own. More on this from the Toronto Globe and Mail.
I don’t agree with outgoing OCC head John Dugan that the Basel III accords, and their capital requirement rules, will lead the banks to minimize their trading as well, because the accords seem to be allowing for ridiculously high leverage and ridiculously low capital. But it’s another potential example here of how, if done properly, Dodd-Frank could make an impact.
The key going forward will be continued vigilance on the part of the regulators and the lawmakers overseeing them.
