To comply with Dodd-Frank, banks from Goldman Sachs to Morgan Stanley and JPMorgan Chase & Co. have said they would break off or wind down proprietary units.
“We should not be a firm that is betting our shareholders’ capital for our own benefit,” Morgan Stanley CEO James Gorman, 54, said at a Securities Industry and Financial Markets Association conference in November 2010. “We should be working with our shareholders’ capital for our clients’ benefit.”
Even so, with banks pushing in Washington to limit the trading rule, not all proprietary bets were banned. Former Fed Chairman Volcker, who graduated from Princeton 50 years before Oneglia and Adamson, pushed to bar long-term investments when Dodd-Frank was written, according to three people with knowledge of the talks. He tried again when regulators drafted rules based on the legislation, they said.
“There were so many elements of the rule that in order to get it passed had to be softened quite a bit, and that may very well have been one,” Kimberly Krawiec, a law professor at Duke University in Durham, North Carolina, said of the focus on short-term trading. “There’s going to be more prop trading than what the general public and perhaps even some experts believe.”
‘Volcker Firewall’
Regulators, who had planned on completing rule-writing by the end of 2012, now expect to finish early this year, according to Fed Chairman Ben S. Bernanke. Firms have until July 2014 to conform to the trading rules.
“The Volcker firewall in Dodd-Frank set up a clear distinction between lending banks and hedge funds,” said Jeff Merkley, an Oregon Democrat and one of two senators who inserted the trading ban into the legislation. “Any way you slice it, the work of the London Whale and similar setups are hedge funds, whether the trades endure days or months. The regulators have full authority and clear direction to prohibit these operations. They have stalled for two years, and it is way past time for them to act.”
Not Venal
Even before JPMorgan lost about $6.2 billion on wrong-way bets by a trader who came to be known as the London Whale, the SEC expressed confusion about how much wagering the firm was doing with its own money. The agency wrote to the New York based bank, the largest in the U.S by assets, after the company said in 2011 filings that it no longer had proprietary holdings in its equities unit. It “is not clear if this was the extent of your proprietary-trading business,” the SEC letter said.
At the lunch in Washington where Blankfein spoke, he was asked by private-equity billionaire David Rubenstein, co-CEO of Carlyle Group LP, if Goldman Sachs makes the bulk of its profit from proprietary instead of client work. Blankfein, 58, said the firm no longer wagers its own money without client interaction.