US Congress puts out 'sell' order on banks
President Barack Obama said the bill's compromises give him 90 per cent of his wish list for bank reform
US lawmakers and their Wall Street supporters may have guaranteed another financial disaster like the one we're still recovering from.
Congress last week thought it was protecting the banks especially the six dominant players when it gutted the financial reform bill.
Investors thought so too. They bid up bank shares on Friday. The Standard & Poor's 500 Financials Index jumped 2.8 per cent. JPMorgan Chase rose 3.7 per cent, Goldman Sachs Group was up 3.5 per cent.
Sorry, folks, you have it wrong. Congress was actually telling you to sell bank shares.
Ignoring evidence that investors were defrauded by subprime mortgage instruments that even bank bosses didn't understand, lawmakers are refusing to rein in the culprits.
Exchange-traded funds
Now we can be sure that soon we will be hoodwinked again by some cockamamie investment good for nothing but commanding commissions and promising trading profits for the banks. How about a package of exchange-traded funds, peppered with ones that use leverage and derivatives?
President Barack Obama said the bill's compromises give him 90 per cent of his wish list for bank reform. The remaining 10 per cent might be the killer. Congress is caving in to pressure from the banks in two significant areas.
Rather than forcing banks to spin-off all derivatives trading as separate businesses — preventing them from gambling with depositors' money — Congress will let them keep trading the instruments if they are hedging their own risks or for interest rate and foreign exchange swaps.
They will have up to two years to move derivatives that can't be traded through a clearing house, including credit default swaps, into a separately capitalised subsidiary.
Load up on debt
Lawmakers also watered down the Volcker rule, named after its proponent Paul Volcker, former chairman of the Federal Reserve and an Obama adviser. Banks will be prohibited from trading for their own account.
But Congress failed to ban them from investing in hedge funds, which bet on the investment fad of the day and charge huge fees, and leveraged-buyout funds, which load up on debt as if tomorrow never comes.
The institutions will be allowed to invest as much as three per cent of their so-called Tier 1 capital into such funds. That allows JPMorgan Chase, for instance, to invest $3.9 billion in these ways.
Wall Street didn't get its way entirely. The ban on proprietary trading should protect bank shareholders from a fair amount of nonsensical risk-taking with their money.
Banks will lose their advantage in setting prices on derivatives when the business goes to central markets where prices are set by all traders.
