Banks Already Working Around FinReg Rules
Remember that controversial rule in the financial regulatory reform law, designed to prevent banks from making risky bets on their own behalf? It did not take
Jul 31, 2020677.4K Shares9.2M Views
Remember that controversial rule in the financial regulatory reform law, designed to prevent banks from making risky bets on their own behalf? It did not take longfor banks to figure out how to get around it. At The Atlantic, Daniel Indiviglio explainsthat banks including Goldman Sachs are just reclassifying “proprietary traders” — ones who trade the company’s own money — as “asset managers.”
“„One of the more aggressive new requirements, the so-called Volcker Rule, would limit proprietary trading to 3% of Tier 1 capital. But the rule may be easy to sidestep. Goldman Sachs is leading the way around the regulation, by simply reclassifying many of its prop traders as asset managers. One major initial criticismof the Volcker rule was that it’s hard to distinguish prop trading from market making. Goldman is using this blurry line to its advantage.
The problem is that it is virtually impossible for regulators to tell whether a bank is making a trade for a client or on its own behalf. Shouldn’t it be easy to tell, depending on who keeps the profits or eats the losses? Indiviglio explains, not so much:
“„Prop Trading
“„A bank senses that XYZ corp is going to collapse. So its prop traders short the stock by selling stock option contracts to investors who want to bet long on XYZ’s continued success.
“„Asset Management
“„A bank senses that XYZ corp is going to collapse. So its asset managers short the stock by selling stock option contracts to their clients who want to bet long on XYZ’s continued success.
“„You may have noticed that, other than the two strikethroughs which merely changed terminology, those two descriptions were identical. The firm accomplishes precisely the same end. The Volcker rule, thus, boils down to semantics. It’s only prop trading if you fail to classify a trade as “client related.” And there it is — the first big loophole in the new financial regulation bill found and exploited. It barely took a week.
“„The score so far: Big Banks 1, Congress 0
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](http://www.theatlantic.com/business/archive/2010/07/goldman-hops-over-the-volcker-fence/60690/)
Paolo Reyna
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Paolo Reyna is a writer and storyteller with a wide range of interests. He graduated from New York University with a Bachelor of Arts in Journalism and Media Studies.
Paolo enjoys writing about celebrity culture, gaming, visual arts, and events. He has a keen eye for trends in popular culture and an enthusiasm for exploring new ideas. Paolo's writing aims to inform and entertain while providing fresh perspectives on the topics that interest him most.
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