Summary: Will the Volker Rule take down financial stocks?The limits on proprietary trading that are part of the Dodd-Frank act are supposed to make banks safer. Big banks often run several businesses. They have their traditional deposit-and-loan business, intermediating funds between savers and borrowers, and they often have a financial broker-dealer business, providing investment products for their wealthier clients. Twenty-one banks are designated as Primary Dealers, participating directly in the Treasury Department’s periodic auctions of government debt.As dealers, the banks have a responsibility to make markets in the securities they sell, providing liquidity so that if a customer needs to buy or sell a bond between when it is issued and when it matures, he can. That liquidity is important. If investments weren’t liquid, the cost of capital would be a lot higher.But there’s a fuzzy line between making markets and taking positions. Trading desks are expected to be profit-centers, not just order-takers. Banks invest a lot of capital in their trading operations—terminals, news-feeds, cookie-carts—and they expect a return. The Volker Rule is an attempt to limit how much banks trade for their own accounts, as opposed to providing liquidity for their clients. But it’s complicated: the rule is 71 pages long, with 892 pages of explanations.At its heart, the Volker Rule will be a multi-layered computer algorithm that big banks will manipulate in order to game the system. Successful traders stymied by regulations will set up their own proprietary funds, as they always have. Byzantine rules rarely have long shelf lives, and the financial sector is evolving rapidly. Unless the rule is regularly amended, it’s unlikely to keep up with the marketplace.The Volker Rule won’t change much because it tries to out-complicate our complicated banks. In the struggle of big versus safe, complexity favors the big.Douglas R. Tengdin, CFA Chief Investment Officer Hit reply if you have any questions—I read them all!Follow me on Twitter @GlobalMarketUpddirect: 603-252-6509 reception: 603-224-1350www.chartertrust.com • www.moneybasicsradio.com • www.globalmarketupdate.net
