It’s Friday quiz time! Ready? Here goes:
- Take a couple of clued-up Brooklynites in their 30s.
- Add section §619 of Dodd-Frank, aka the “Volcker Rule”.
- Now throw in a lawyer.
What do you get?
[Hint: It's America.] Read more
It’s Friday quiz time! Ready? Here goes:
What do you get?
[Hint: It's America.] Read more
GOLDMAN SACHS HAS A SECRET PROPRIETARY-TRADING UNIT THAT IS RISKING THE BANK’S OWN CAPITAL BY MAKING INVESTMENTS AND CEO LLOYD BLANKFEIN SAID GOLDMAN WASN’T PROP-TRADING ANYMORE AND THAT IS WRONG AND HE LIED AND HE SHOULD BE HOG-TIED WITH HIS OWN BLACKBERRY CHARGER.
There’s no shortage of concerns about the impact that new regulations will have. Basel 2.5 hitting the bond market, the prohibition of ratings under Dodd-Frank hurting the beleaguered mortgage market, and the restrictions on prop trading by the Volcker Rule — which may lead to a giant sucking sound where the liquidity of several markets used to be.
The comment period for the proposed Volcker rule, that bans banks from proprietary trading, is set to close on January 13th. However, Reuters reports that a 30-day extension is expected, citing a person with knowledge of the decision. On Thursday, Texas Republican Randy Neugebauer released a letter from 121 lawmakers that states concerns from various industry stakeholders that the rule in its current form will ultimately lead to higher borrowing costs for American businesses. The letter also suggests that a second proposal is released for comment before the publication of the final rule.
In its present form, the Volcker rule has the potential to change compensation structures. Not only that, but the Volcker rule cares about what your intentions were when you executed a trade. Starting to worry? FT Alphaville takes a look at these aspects of the proposed rules then goes over some recommendations about what to focus on when writing those all important comment letters to regulators about how they are trying to kill your business.
To kick off, here’s the specific section on compensation (emphasis ours): Read more
Last week, Bloomberg provided more details of what’s to be expected from the upcoming Volcker rule.
The headline focused on the fact that all bank divisions would be subject to restrictions that would limit their ability to take advantage of short-term price movements in securities and derivatives markets for proprietary gain (or loss, as the case may be). Read more
Morgan Stanley agreed to spin off its last big proprietary trading desk by 2012 in a move that brings it a step closer to meeting the new Volcker rule which prohibits banks betting their own capital, the FT says. Meanwhile, Bloomberg reports that Morgan Stanley’s post-crisis business strategy of relying more on its 18,000 brokers and less on debt-fueled risk-taking has yet to attract investors to the bank’s stock.
The last big proprietary trading team at Goldman Sachs has begun raising money to start a new hedge fund independent of the bank, for launch Q2 of this year, the FT reports. The team – led by two senior members of Goldman Sachs Principal Strategies desk, Daniele Benatoff and Ariel Roskis – has already secured a $300m investment from Brummer & Partners, according to people familiar with the plans said. GSPS is the bank’s “secretive equities arm,” Financial News says, and the move is on the back of the Volcker rule, which prohibits banks risking their own capital in speculative trades.
Regulators are pressing for strict and detailed definitions of proprietary trading activities to be banned under Dodd-Frank, exposing a split in government on how to implement the so-called Volcker Rule, the FT reports. Former Fed chair Paul Volcker, the ban’s inspiration, wants a broader interpretation that would give regulators leeway. By contrast, Treasury officials want measurable metrics to prevent traders using loopholes in the law to get round the ban, sources said. Wall Street executives said officials indicated they were interested in looking at the length of time a bank holds a trading position, its size and risk, when deciding whether a transaction constitutes proprietary trading or market-making on behalf of customers. Final proposals are due in January.
In these Dodd-Frank times, hiring nine traders from Goldman Sachs’ prop desk is a coup in any case for KKR. But the move also typifies a shift for the private equity behemoth away from LBO business into a more diversified mix of stock and bond trading, the WSJ reports. The ex-Goldman traders will join just as KKR sets up a long-short stock fund, its first since being founded in 1976. Several other PE giants are buying up hedge funds and debt trading businesses, but KKR’s fund is a step into a much more volatile asset class, notes the FT. Even so, as far as diversification is concerned, the company still has some way to go in catching up with its main rival, Blackstone, says NYT Dealbook.
The future of the British banking sector, might just be right here
On Friday we get the trailed publication of the UK Independent Commission on Banking’s so-called ‘Issues Paper’ and call for evidence. It’s 68 pages of rip-roaring industry stuff, but we’ve picked out the more interesting “reform options” for you below. Read more
Goldman Sachs is set to close its proprietary trading unit and move its traders to either an independent hedge fund or its asset management arm to comply with new US law and prevent an exodus of star employees, the FT reports. While no final decision has been made, insiders say Goldman wants to move quickly to stay ahead of rivals and reassure staff. It also emerged on Wednesday that buy-out firms KKR and Perella Weinberg are in early talks with key individuals in the Goldman unit about possible recruitment. Separately, the FT reports that Goldman has poached a UBS banker, Philip Shelley, co-head of UBS corporate broking. Meanwhile, author and commentator William Cohan commends Goldman’s ‘savvy’ move in a Bloomberg Television interview.
FT Alphaville noted last week that despite all the reports of spinning off units in response to the Volcker Rule, banks weren’t finished looking for creative ways to continue doing business as usual — especially for their more profitable activities. The banks don’t pay lawyers and lobbyists for nothing.
Goldman Sachs is preparing to shut down the unit that trades with the bank’s funds and move its traders to either an independent hedge fund or its asset management arm to comply with new US law and prevent an exodus of star employees, reports the FT. Proprietary trading and private equity investments account for about 10 per cent of its revenues – a higher percentage than its rivals.
Some financial institutions are hurrying to find new roles for their star proprietary traders, the Wall Street Journal reports, as the US financial reform bill disallowing most prop trading at banks heads toward final Senate approval. Citigroup, for instance, is considering transferring about 24 prop traders onto desks that trade with the firm’s clients, the WSJ says, citing people familiar with the situation.
A year-long financial reform effort in the US approached the finishing line on Thursday with Wall Street banks braced for an expensive restructuring intended to prevent any repeat of the 2008 financial crisis, says the FT. The final days’ arguments have centred on limits for derivatives dealing and the Volcker rule that prevents banks from proprietary trading and restricts their relationships with hedge funds and private equity firms.
Auto dealers will escape oversight by the new consumer protection agency being set up by the House-Senate financial reform bill now in conference, Reuters reports. Banks are meanwhile close to finding out how limits on their proprietary trading will be resolved, as legislators meet to discuss the issue on Wednesday. Consumer protection will be a key focus when the reforms are passed on Thursday, with some Republican opposition to the new agency, the FT adds.
A definition of the vertical integration model from Wikipedia:
In microeconomics and management, the term vertical integration describes a style of management control. Vertically integrated companies in a supply chain are united through a common owner. Usually each member of the supply chain produces a different product or (market-specific) service, and the products combine to satisfy a common need. It is contrasted with horizontal integration.
A former Merrill Lynch proprietary trader has been banned from working in UK financial services for at least five years for “mismarking” his trading positions amid the financial crisis in actions that ultimately cost his employer $456m. Alexis Stenfors was suspended in February 2009 after admitting he had “deliberately overvalued” his positions by $100m between mid-January and mid-February, the FSA said on Tuesday.
Citigroup Inc., the bank 27 percent owned by the U.S., is bolstering a unit that trades stocks with the lender’s own money after a proposed government ban of proprietary trading helped spur eight of its 22 employees to defect, people with direct knowledge of the matter said.
Chris Dodd, Democratic chairman of the US Senate banking committee, on Monday proposed a tougher-than-expected curb on proprietary trading in a financial regulation bill that injected new momentum into reform efforts. Key Republicans warmed to the bill, saying it was close to a product they could support, but much of the financial industry continues to oppose it. See also FT Alphaville for why Wall Street should have seen a prop-trading ban coming.
An eight month-old pdf holds a few clues as to what to expect on the Volcker rule front. Read more
John Kemp, columnist at Reuters, admits there is no easy way of identifying how much money the major banks make from prop trading.
However, he points out there is a way to breakdown which banks depend most heavily on trading income rather than investment or commercial banking activities. Read more
REMARKS BY PRESIDENT BARACK OBAMA
SUBJECT: ADDITIONAL REFORMS TO THE FINANCIAL SYSTEM Read more