What The Top Wall Street CEOs REALLY Think About Banning Prop Trading

jamie dimon vikram pandit

In the last two weeks, most major American banks announced their third quarter earnings – each one sending the markets on a rollercoaster ride.

But earnings announcements comes with more substance than just quarterly numbers – during earnings conference calls, research analysts from other firms have the opportunity to grill and question the bank executives about their company.

With the recent release of the draft Volcker Rule for public commenting, the bank heads got their share of inquiries to weigh in on the proposed rule. The rule, part of the Dodd-Frank Act, is meant to ban proprietary trading (trading for profit) at financial firms in order to remove investment banking and trading risks from the bank’s commercial operations.

We rounded up what executives at five top American banks had to say about the Volcker Rule. (The topic was absent from the Wells Fargo conference call).

Jamie Dimon, CEO of JPMorgan:

'The United States has the best, deepest, widest, and most transparent capital markets in the world which give you, the investor, the ability to buy and sell large amounts at very cheap prices. That is a good thing. I wish Paul Volcker understood that. OK?'

'Now we understand why there is no proprietary trading. That was fine. And these are like - I haven't read them all yet - like 178 rules or reporting and compliance around what is proper market-making. We have to be in a position to do proper market-making for our clients. Most of our business is market-making.'

'So there is going to be commentary... I hope all of you on this phone understand how important this is, not just for your own business but for future of the United States. And we hope at the end of the day we will be able to make markets freely. If American companies are put at huge disadvantage, the foreign companies... we were told everyone is going to adopt this, which we know is not true. So now it would be even a bigger deal.'

Source: 2011 Q3 Earnings Call Transcript

James Gorman, CEO of Morgan Stanley:

'In regards to Volcker, it is far too early to determine the impact on our business model and the industry. We understand the regulators are trying to strike the right balance of preventing prop trading by depository institutions, but at the same time allowing for market-making and liquid markets... It is critical that the Volcker Rule does not restrict activities necessary for market-making and liquid markets. We and the rest of the industry have an opportunity now to weigh in on these issues during the upcoming comment period.'

'What stood out to me was that a simple proposition of ensuring that depository institutions don't take on aggressive proprietary trading was converted into 290 pages, with an additional 394 comments - questions asking for commentary, some of which have multiple parts to them.'

Source: 2011 Q3 Earnings Call Transcript

David Viniar, CFO of Goldman Sachs:

'The proposed rule... leaves more questions than answers.'

'We have already shut down our walled off proprietary business, so that is gone. We think that any investment in funds will be limited to 3%, and other than that, more questions than answers.'

'Some of the issues we see are, at least as it is now written... there is tremendous operational burden and cost of compliance for the entire industry. Some or all of that would need to get passed through. It could result in diminished liquidity. That would hurt our clients and the markets. And, you know, we are also focused on the competitiveness of the U.S. financial institutions. So I mean those are some of the questions at the top of our mind, but, as we have said, there is 1,000 questions in there.'

Source: 2011 Q3 Earnings Call Transcript

Vikram Pandit, CEO of Citigroup:

'Basel III, Volcker are definitely going to have impacts on the kind of businesses you're in - the credit businesses like securitization, some of the derivatives businesses, those that are non-clearinghouse counterparty businesses are going to be affected by that. You've got to scale for that.... So on one hand you reduce the business. On the other hand, on a getting ready for it basis, the expenses are higher.'

'None of us truly know where the Volcker rules are going to come out. And they are going to have an impact and we need to watch that. But in our own case, as I'm sure elsewhere, we've been getting ready for that, making sure that we can comply with the definitions of proprietary trading and other activities.'

Source: 2011 Q3 Earnings Call Transcript

Brian Moynihan, CEO of Bank of America:

'Obviously, those regulations are still evolving. As I think others have said, the amount of compliance and regulatory costs that go along with that, while the costs may not be high, there is obviously a lot of work that will need to be done associated with those to ensure compliance and we will obviously work through those.'

Source: 2011 Q3 Earnings Call Transcript

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