Minyanville Underground Railroad: Fear and Loathing on Wall Street
Below is an excerpt from Todd's column, Fear and Loathing on Wall Street, which will publish on Minyanville tomorrow morning. This is a MUR exclusive:
Banks have long suffered from a perception problem but that has evolved into a populous uprising; people are pissed and in many cases, rightfully so.
The easy money unleashed to stem the financial crisis had the unintended consequence of ballooning profits at many of the companies central to the storm. As patience thins on Main Street and regulatory headwinds stiffen, the witch hunt is widening with each passing day.
We shouldn't be surprised by the posture in Washington; policymakers were toothless tigers before the crisis and pendulums tend to overshoot in the opposite direction. The fact that President Obama dropped his regulatory bomb the same day Goldman Sachs (GS) reported earnings wasn't a coincidence.
"The Volcker Rule," as it's being called, takes aim at proprietary trading, among other things. While the proposed concept certainly makes sense -- the mandate of a bank should be to protect the deposit base -- the devil resides, and may be unleashed, in the detail of execution.
Broker-dealers facilitate customer order flow and those positions are traded on behalf of the bank. Attempts to limit that functionality would let loose a fresh set of unintended consequences, including but not limited to market liquidity. If, on the other hand, the rule is aimed at pure prop desks, the net effect will be marginal, at best.
There is a high degree of probability this will serve as the first in a series of steps that will include credit default swap reform, off-balance sheet transparency, short-sale restrictions and perhaps transaction taxes. The trick to these trades will be the ability to introduce perceived solutions without inducing a state of systemic shock.
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Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at firstname.lastname@example.org.
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