Posted 05/24/2012 By Matt Stichnoth

REMINDER: CERTAIN TYPES OF LOSSES NOT MORE EQUAL THAN OTHERS

I don’t think I buy Sallie Krawcheck’s line that “complexity . . . defines Wall Street and forms some of finance’s highest barriers to entry.” Maybe she just didn’t express herself clearly. But this bit from Sallie makes total sense:

With the Volcker rule banning proprietary trading, there appears to be an implicit perspective that the source of risk matters. . . . [T]he idea that a proprietary trading loss is in some way more painful than losses on, say, mortgage loans or litigation. I would guess that shareholders, depositors and even US taxpayers would find loan losses that caused a big bank insolvency to be every bit as painful as one caused by proprietary trading. And even assuming that proprietary trading losses are more idiosyncratically painful, those who have spent any time in or around Wall Street understand that identifying a trade as proprietary is a fruitless exercise. The line between proprietary trading, client facilitation and hedging is so thin as to be often nonexistent. [Emph. added] 

Regardless of the source, a loss counts as 100 cents on the dollar, right? That’s what I thought. Regulators’ new fetish that prop trading represents a uniquely ominous risk is worse than useless since, at the margin, it will likely make them complacent in overseeing the part of the business that is consistently the source of its really big blowups: lending. Shall we call the roll? Energy . . . LCD . . . commercial real estate . . .subprime residential . . . Don’t make me go on, my hands are starting to get tired. . . .


12:09 PM  

Gus Levy Posted On 5/24/2012 4:38:10 PM

You seem to forget that there are some very perverse incentives at work for incentivized traders playing with the "OPM" that is actually a contingent liability for the taxpayer. That made a whole lot of sense back when commercial banking was separated from investment banking. Now that the yahoo-cowboy-traders of investment banking are allowed to play with government/taxpayer gurantied funds, there are asymmetric risks and rewards. In the old days, the partners of investment banks (you know— the guys who actually had their money at risk) kept a very close eye on the hired help.
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Gus Levy Posted On 5/24/2012 4:38:10 PM

You seem to forget that there are some very perverse incentives at work for incentivized traders playing with the "OPM" that is actually a contingent liability for the taxpayer. That made a whole lot of sense back when commercial banking was separated from investment banking. Now that the yahoo-cowboy-traders of investment banking are allowed to play with government/taxpayer gurantied funds, there are asymmetric risks and rewards. In the old days, the partners of investment banks (you know— the guys who actually had their money at risk) kept a very close eye on the hired help.
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