News of the death of the Volcker rule may have been premature.
The Volcker rule, which would prohibit commercial banks from engaging in proprietary trading, seems to have made JP Morgan reconsider its bid to by all of RBS Sempra, the energy-trading business owned by the Royal Bank of Scotland and Sempra Energy.
Instead of buying the entire business, JP Morgan paying $1.7 billion for just parts of the business. The announcement of the Volcker rule in January “coloured” JP Morgan’s decision to buy just part of the business, according to the Wall Street Journal.
The most valuable trading units are still for sale. This raises a serious question about whether the Volcker rule will seriously depress the values of financial businesses. By taking big banks out of the game, the Volcker rule should reduce demand for everything from hedge funds to private equity firms. It’s simple economics from there: reduced demand means falling asset values. This could mean that banks would have to mark-down the values of any of these outside businesses they purchased during the boom years.
Of course, banks will likely find ways to avoid write-downs on the values of their trading operations. There are lots of ways to do this, including making sure that they are carrying the assets on a long-term, not-for-sale basis. But this might not be credible if the Volcker rule becomes law. At that point, the assets will clearly have to be sold—and probably written-down to reflect the reduced demand.
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