While BP has purportedly started toying with Bankruptcy for just a 25% share of the Deepwater Horizon, paying for its costs, Joseph Stiglitz, an Economist known to favour India and China brand of regulation has added to further woes for merger and deal specialists Goldman Sachs and Morgan Stanley. While JP Morgan has a significant retail presence, GS and Morgan Stanley were probably toying with hedging with the bank charter designation for their thinly attired banking operations or so Stiglitz opines.
Volcker’s rule defines investment banks born again as those who can or cannot trade in their own accounts based on whether they accept deposits, while an agricultural shot from
MelanieBlanche Lincoln swipes a proposed amendment banning banks from holding derivatives positions at all. These questionable ‘reforms’ target banks and investment banks at an opportune time. Given that JP Morgan has just lost $300mn in Coal punting in Europe and European banks like BNP and SocGen( whose own rogue trader trial of Jerome Kerviel is also on right now) hold swaps in trillions on Greek and Spanish debt that is losing itself in finite percentages every day, some or all of these regulations would definitely be made into a law governing the probable rise of bad boutique traders like LTCM yet again out of the various adds of trading desks, Real estate funds and commodity plays added by the investment banks since 2000.
However, Stiglitz’s Goldman Sachs amendment is not so ill considered unless the investment banks are considering flip flopping status buying and selling bank holding company status much like Carbon certificates that cost $25 a pop. His GS amendment as stated in mainstream media thus backs a one-time treatment for those wishing to apply or keep bank holding company status. Conservative regulation banning trading desks however may be not executed at a holding company level.
Now that US also wishes to be an investment destination it will do well to fall into line with global regulation and not get waylaid by well-meaning local monstrosities or equally arcane British hokum. Global professionals have targeted reform correctly over more than a decade, a good example being Basel II and such regulation could collectively hold the key to a sane regulation with transparency and public record keeping standards more critical than blanket treatments that bring everyone back to the desk in less than a year modifying and tinkering with quick regulation fixes once they start backfiring.
Without derivatives, liquidity may be impaired by well above 75% of even current levels with any re-lending to banks compulsorily done by derivatives covering that collateral. Profitability and thus bankability of the banks may itself be as low as a shaky US Economy satisfied with inflation targets of just 2% ( which to me and any model of growth induced economics is already at the border of deflation and death) A 2% NPM for banks may not enthuse investors or even consumers to bring deposits to the banks.
Corporate debt business is almost dead right now with total trading also down a good 20% over a poor 2009. Economic lending even in emerging markets and across any borders hedges political risk, currency risk and many more windmills fighting Quixotes that well might kill a deal without the indices, the ETFs and the derivatives market that keep it liquid.
What is probably going wrong is that the big guys are trying to use their size to leverage a better deal and that is tweaking too many ears without taking note or gaining any knowledge of what the big deal is demanding. Thus the required transparency and the already committed deleveraging at these banks would well take care of such scenarios. Governments should avoid looking like novice knights at Sir Arthur’s round table and get back to the business of growing the Economy. Frank and Dodd’s leave depth out of the question and treat regulation like a high school kid with a prom night to go to, working on his essay assignments with much ad libbing and no new understanding to speak of. Phil Angelides’ Financial Crisis Inquiry Commission also mostly seems ill informed and unable to appreciate the questions of propriety despite teams that are seemingly well read to assist the case work. It may in fact seem more appropriate to get Goldman Sachs and Berkshire Hathaway into the law making than treat them like petty thiefs being caught and trapped by schoolboys.