In his latest piece for Bloomberg, Michael Lewis explains why banks that lobbied so exhaustively to make sure Dodd-Frank wouldn’t destroy their prop desks, seem to now be dumping their traders or dispatching them to new homes regardless.
The answer is pretty simple according to Lewis. Apparently the banks have zero intention of halting prop trading practices and are simply camoflaging those ventures by renaming the activity.
According to Lewis, here’s the part of the new law that is going to be walked all over:
Unless otherwise provided in this section, a banking entity shall not —
(A) engage in proprietary trading; or
(B) take or retain any equity, partnership, or other ownership interest in or sponsor a hedge fund or a private equity fund.
And here’s why (from Sec. 989. of Dodd-Frank):
The term ‘proprietary trading’ means the act of a covered entity investing as a principal in securities, commodities, derivatives, hedge funds, private equity firms, or such other financial products or entities as the [Government Accountability Office] may determine.
Lewis’ bond trader said that because those three little words – as a prinicipal – get to be defined by the Government Accountability Office (GAO) and the GAO has no idea what it means either – (“We’re really too early in the process to speak to how we might define it,” said spokeswoman Orice Williams Brown to Lewis) bankers aren’t bothering to wait around and have taken it upon themselves to clarify its meaning.
Traders are giddy over the words, says Lewis.
An ex-JP Morganer who used to work for the bank’s Chief Investment Office told Lewis that the unit was making huge bets with the bank’s capital despite marketing itself as a hedging desk, and would keep carry on doing it irrespective of the Volcker Rule.
Lewis also spoke at length with a former Lehmanite who is writing a thesis on the history of prop trading at NYU. The ex-corporate bond trader has been chatting up other bond salesman who “have been surprisingly open about their intentions to exploit one obvious loophole in the new law.”
Basically, “there are a hundred different ways to claim to be acting as an agent or for a customer,” the ex-Lehman Brothers trader told Lewis, and that is going to be how commercial bankers will take on propietry positionswithout breaking any rules.