U.S. Bank Regulation - A Bridge to Nowhere?

By: Ian Campbell | Thu, Oct 13, 2011
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An article late Tuesday says 'Volcker rule unveiled as U.S. curbs Wall Street bets' - reading time 4 minutes. The article reports that on Tuesday U.S. regulators put the so-called 'Volcker Rule', named after former Federal Reserve Head Paul Volcker, out for comment with a three-month open comment period that ends on January 13.

New banking rules arising out of this process apparently are scheduled to go into effect on July 21, 2012. The proposal, which is said to include more than 350 questions regulators want 'interested parties' to comment on - which I think ought to include pretty much everyone - will no doubt keep a lot of Investment Bank executives and their professional advisors up 24 hours a day for the next three months.

As I read this article, the proposals, if enacted as presented would ban Wall Street Banks from trading for their own profits, which the articles say "could shave billions of dollars in annual revenues" - I say 'read bottom lines'. Given the political donation and lobbyist U.S. Federal Government environment, I think such a result is highly doubtful. The article says, and I am sure justifiably, that "drawing the line between prohibited and permitted trading often involves subtle distinctions that are difficult both to describe comprehensively with regulation and to evaluate in practice". What does that mean? Simply put, probably that any U.S. Bank Regulations enacted around proprietary trading rules will use complicated language - with multiple resultant 'loopholes' that 'trucks will be driven through'.

The proposals also would prohibit banks from investing in, or sponsoring, hedge funds or private equity funds. While I suspect this is all 'too little, too late' in coming, it seems to me that one important question is: How in the world if such a proposal is legislated into law work as a practical matter work without having a material effect - and likely a negative one - on the hedge fund and private equity markets?

This will be something to follow with interest, both in the context of what become the final proposals themselves, and how this process will play out in the context of U.S. Investment Bank stock prices. One thought I have in is that all the money and effort spent by the U.S. Federal Government after 2007 in subsidizing the Investment Banks and parties in related businesses may in the end prove to be a 'bridge to nowhere'.



Ian Campbell

Author: Ian Campbell

Ian R. Campbell, FCA, FCBV
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Through the Economic Straight Talk Newsletter Ian R. Campbell shares his perspective on the world economy, the financial markets, and natural resources. A recognized business valuation authority, he founded Toronto based Campbell Valuation Partners (1976), Stock Research Portal (2007) a source of resource companies market data and analytic tools, and Economic Straight Talk (2012). The CICBV* annually funds business valuation research in his name**. Contact him at icampbell@srddi.com.
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