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Strategies & Market Trends : 2026 TeoTwawKi ... 2032 Darkest Interregnum -- Ignore unavailable to you. Want to Upgrade?

To: Metacomet who wrote (96473)	11/10/2012 1:34:42 AM
From: elmatador	Read Replies (2) \| Respond to of 218621

place big US banks in a utility straitjacket...hastening the break-up of financial conglomerates as espoused recently by Sandy Weill, the architect of Citigroup’s supermarket approach to banking in the 1990s. US bank reform must avoid stoking turmoil By Michael Mackenzie in New York The last flicker of hope for bond and derivative traders was in effect snuffed out this week. Wall Street has made no secret of its frustration in recent years with bank bashing from Washington and the landmark Dodd Frank Act that imposes greater scrutiny and oversight on the industry. Not surprisingly, many workers at top Wall Street groups, notably Goldman Sachs, Bank of America, Morgan Stanley and JPMorgan, backed the election campaign of Mitt Romney, in the hope that recasting financial reform would be the big story for 2013. One only has to look at the sharp midweek sell-off for leading US banks, before they recovered some ground on Friday, to see how a “status quo” result has diminished such hopes. More troubling for bank executives is the prospect of facing one of their harshest critics in Elizabeth Warren, who was elected to the US Senate and is favoured to land a place on its banking committee. Having helped establish the Consumer Financial Protection Bureau in the wake of Dodd Frank, and earned the enmity of bankers, Ms Warren now looms as a key player in opposing any moves to weaken the broad thrust of Wall Street reform.Wall Street and its industry lobby groups will not stop trying to water down elements of financial reform, particularly as some two-thirds of the 398 rules under Dodd Frank are not yet finalised. Such an effort, however, will only run up against a Democratic bulwark thanks to the election result. Both the Securities and Exchange Commission and the Commodity Futures Trading Commission, the two main regulators that will implement Dodd Frank, will have a Democrat majority among the five commissioners that comprise each agency. Indeed, the post-election chatter among some bankers has focused gloomily on whether Ms Warren and others will look to attack “Too Big to Fail Banks” by imposing outright size caps on financial institutions. Such a move would place big US banks in a utility straitjacket, depressing their share prices, and probably hastening the break-up of financial conglomerates as espoused recently by Sandy Weill, the architect of Citigroup’s supermarket approach to banking in the 1990 Beyond this, the full implementation of Dodd Frank and the Volcker rule, which seeks to ban proprietary trading by banks in securities and derivatives, is shaping up to be the biggest upheaval for the more freewheeling and opaque areas of Wall Street. Regulators have made little secret of their desire for greater electronic trading that opens up markets to more players and improves the transparency of prices, particularly across derivatives. Wall Street recognises the benefits of electronic trading, as a means to cut headcount and boost the bottom line. What they and some of their clients do not like is the concerted effort to push over-the-counter derivatives towards a narrow style of trading that defines activity on futures exchanges. There is a very good reason why swaps eclipsed futures-based derivatives. The flexibility of the OTC contract is a better match for specific interest rate, currency and commodity risk for investors. With the vast swaps market and role of banks being cut down to size, there is a danger that regulators will limit the ability of investment managers to protect their portfolios whenever interest rates and other asset prices fluctuate sharply in the future. It is easy to attack the banks and the place they occupy at the centre of the trading universe, particularly in the good years when fixed income and derivatives create instant millionaires at bonus time. Banking is also an industry, as illustrated by JPMorgan’s “London whale” trading fiasco in credit derivatives in May and the Libor scandal, that invites stronger rules and oversight. Regulators understandably want a financial system where banks take less risk, but their reduced presence in trading will be missed when interest rates start rising and the mania for corporate and junk bonds at record low yields dies, becoming a rush for the exit. Such market volatility is easy to imagine should central banks succeed in reflating their economies. All the more important, then, that now regulators and Democrats have the green light from voters to finish the job of financial reform, they are mindful of striking a balance and avoid stoking more financial turmoil. michael.mackenzie@ft.com Copyright The Financial Times Limited 2012. You may share using our article too