Sure Bet: How Wall Street is Dodging the Volcker Rule

(MoneyWatch)  Is Wall Street really scrambling to comply with the Dodd-Frank financial reform law? Dream on. Despite a number of recent leaks masquerading as news stories about big banks fleeing proprietary trading, as required by the measure, this NYT story suggests the firms are using a clever bit of legerdemain to continue gambling for their own accounts:

When Congress passed a new financial regulation bill last month, it sought to prevent federally insured banks from making speculative bets using their own money. But that will not stop banks from making bets that some critics deem risky, even as the rules go into effect over the next few years.

That is because many such bets -- on the direction of the stock market or the price of coal, for example -- are done on behalf of clients. So, the banks say, they will continue to be allowable despite the new restrictions.

That's the hustle: Make a show of shutting down the offending prop betting units, banish use of the word "proprietary" in reference to "trading" and generally carry on with business as usual under the guise that you're making markets and servicing clients.

"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...."

Even before the new rules were passed, Morgan Stanley (MS) and JPMorgan began dismantling their stand-alone "prop desks" and shifting those traders into client-related businesses. Goldman is considering changes that could turn some of its star proprietary traders into asset managers who rely on capital from outside investors.

And the losses continue. Goldman Sachs (GS) and JPMorgan Chase (JPM) each blew more than $100 million on such trades earlier this year, say reporters Nelson Schwartz and Eric Dash. To flog the woefully bedraggled horse here, the problem is that such institutions are exploiting their access to cheap, federally protected deposits to fund their gambling addiction. And as the 2008 bailouts proved, you, me and every other U.S. taxpayer not hip enough to shelter their income will be on the hook the next time Wall Street craps out.

It looks increasingly like Paul Volcker, the distinguished public servant who proposed the ban on prop trading, got taken for a ride. Writes financial pundit Jeff Madrick:

So much for the Volcker rule. And the great man himself (that is, Volcker) never came to grips with this immense hole in the regulations, either. High risk on Wall Street will go on.

Image from Wikimedia Commons
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