The financial reform bill only changed the way risky trades are made and accounted for – not the amount of risk they’re taking, says an article on the front page of the New York Times today.They’ve figured out how to navigate around the new rules. Now trades are made “on behalf of clients,” a shift we’ve seen coming that’s now working its way into practice at Citi, Bank of America, JPMorgan, Morgan Stanley, and Goldman Sachs.
But trading on behalf of clients is equally risky.
From the NYT:
That’s not very much, but some are worried.
“You can use client activity as a cover for basically anything you are doing,” said Janet Tavakoli, who runs her own structured finance consulting firm. “It’s very problematic that losses like this are showing up. It’s a prime example of what the financial reform bill doesn’t address.”
So banks have changed the name of prop trading, but not the practice. Prop traders are no longer “prop traders,” and many have been moved to client-based desks.
(For a prime example of how the role of prop traders is changing, look how Citi changed one of their star prop traders’s, Sutesh Sharma’s, role at the firm.)
Proprietary trading can easily become related to client operations and very closely resemble the prop trading done on strictly defined “prop trading” desks.
Thanks to a line in the Volcker Rule which specifies trading “operations unrelated to customer operations,” as long as the “prop trading” is done for client-related purposes, it’s OK.
Financial reform did change one thing, however – the amount of risk banks are taking. So that’s good, but not if it’s just a result of bank’s leftover wariness a couple of years after they were bailed out.
Bottom line: banks are still losing money by taking risk – but they are taking less risk, and calling it risk “on behalf of clients,” when they take the other side of the trade.
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