Terry Connelly is dean of the Ageno School of Business at Golden Gate University and is frequently quoted on business, financial, and economic issues by Bay Area local, as well as national, news media.
The Obama “Volcker Rule” precluding banks from proprietary trading amounts to a form of the famous Sarbanes-Oxley Act’s requirement that accounting firms exit the business of consulting for their clients (which was the only consulting worth doing). What Volcker probably wants is a return to the good old days of Wall Street partnerships where the trading risks literally went home with the investment bankers every night, but that “back to the future” scenario is unlikely to emerge. More likely Goldman Sachs will “de-bank” itself as soon as it can, even if it can no longer access the “Fed window” for emergency loans (it already has a “Buffet window”, albeit at a much higher cost).
What is more troublesome is how banks with customer trading business will be able to make a market for their clients and hedge their own institutional risks arising from taking down positions, albeit temporarily, to accommodate clients. Surely from a public policy point of view we would not want the banks to either stop making markets for their clients, or to increase their own institutional exposure by not hedging the risks to their own balance sheet derived from their client accommodation trades. While technically such hedging is of course intended to protect their own account, it does not seem to be the kind of proprietary “speculation” with Federally-protected money that Obama and Volcker want to eliminate. Yetr it would seem to be in the crosshairs of the Volcker rule
Bearing the SOX experience in mind, Congress and the Administration need to take this proposal through a careful vetting to avoid the unintended consequences which always come from hasty legislation. Right now, the biggest beneficiaries of this proposal look to be not the taxpayers but the independent private equity firms and hedge funds not associated with banks. Even if one took the view that, like the accounting firms that gorged on consulting earnings, the banks may have only themselves to blame for this proposal, that would not excuse an accidental attack on truly useful and legitimate practices which in fact promote the proper functioning of the financial markets.
In addition, the new rules’ proponents should explain what the proposed ban on banks “advising” hedge funds or private equity funds entails: does this include providing M&A advisory services and opinions; does it include stock research? Such a prohibition would amount to a back-door partial reinstatement of Glass-Steagall, which should be debated much more transparently.
Finally, on the subject of banks, is the biggest of them all (the Federal Reserve) about to be needing a new CEO? There is a sense that, as in the case of the omnibus health care reform bill, the votes might not be there in the Senate for Chairman Bernanke’s reappointment: will Ben be the next victim of Scott Brown? Or Geithner? Stay tuned: life is unfair, as the former Massachusetts Senator JFK once remarked. (But he would have never said his daughter was “available” at a victory rally!)