Federal Reserve Chair Paul Volcker and President Obama are shooting straight for the jugular with their newly presented proposal to eliminate proprietary trading from large investment firms. Proprietary trading, a firm’s ability to trade for direct gain instead of for commission (as seen in hedge funds), allowed the top tier of today’s investment banks to thrive over their industry counterparts. However, with top firms such as Goldman Sachs, J.P. Morgan, and Morgan Stanley so heavily weighted in prop trading, this restriction will essentially be sending these firms back to square one with the wave of a pen. Bringing in more than 90% of Goldman’s pretax earnings last year, the prospective restrictions on prop trading are obviously going to bring a resounding halt to the investment firms’ recoveries.
At the Economic Club of New York, Volcker was quoted as saying, “The point is that they present added risk and virtually unmanageable conflicts of interest with more essential customer relationships.” And moreover, Obama in his January 20th address stated, “My resolve to reform the system is only strengthened when I see a return to old practices at some of the very firms fighting reform; and when I see record profits at some of the very firms claiming that they cannot lend more to small business, cannot keep credit card rates low, and cannot refund taxpayers for the bailout. It is exactly this kind of irresponsibility that makes clear reform is necessary.” Thus, with the best interest of Joe the Plumber (is that term still kosher?) in mind, Obama has deemed the current financial services industry unfit to exist in its current state. And as such, Obama is dramatically restructuring the present financial landscape.
This proposal addresses two essential issues: limiting the scope and limiting the size. To limit the scope, Obama plans to “work with Congress to ensure that no bank or financial institution that contains a bank will own, invest in or sponsor a hedge fund or a private equity fund, or proprietary trading operations unrelated to serving customers for its own profit.” And to limit the size, Obama plans to “place broader limits on the excessive growth of the market share of liabilities at the largest financial firms, to supplement existing caps on the market share of deposits.”
So, with the economy in the state that it is- are we ready to put such a heavy burden on the financial industry? Like Obama said, that these investment firms cannot lend out even though they are realizing record profits, how would they perform under these unrelenting restrictions? And if the banks cannot loan out apt amounts of money, what are the grander implications on the recovery of the U.S. economy?
And on an unrelated tangent…
http://pragcap.com/the-ultimate-guide-to-2010-investment-predictions-and-outlooks
A good read for those with time
TARP deployed upto $700bn to save the financial system. The final cost however turns out to be much lower. In August 2009 the bill was estimated to be $341bn, revised down to $117bn this month. The final number, according to the administration, is expected to be $90bn.. and that is almost equal to carmakers bailout + AIG + subsidies to homeowners. America did not even experience a simultaneous currency crisis. This really means that the crisis barely costs 1% of the GDP!
