Power And Dollar

Did Obama Plagiarize Glass And Stegall?

Did Obama’s Volcker’s Rule announcement contribute to the drop of DJ?  Did Obama plagiarize Glass and Stegall?  Pundits all over the place say that is the result of the Volcker’s Rule.  One, Volcker’s Rule alone did not necessitate the fall.  Two, who among these pundits actually read what the White House press release, and not the Bloomberg announcement, is about?  Three, Volcker’s Rule is not “new”.  Volcker’s Rule is actually a re-tro.  Four and finally, what is the implication/impact (theoretical or academic) of Volcker’s Rule?  What can we learn from Geithner’s opposition to this Volcker’s Rule?

Yahoo (of all places) actually hit it right: there are plenty of reasons for DJ to fall.  Realizing the profits from Massachusetts Senator election is quite a good reason already.  In fact, the rise of DJ on Tuesday contradicts the fall of DJ on Thursday: DJ rose because the market expected that having 1 more Republican in the Senate would derail the agenda of Obama.  If investors believed in that, then the investors could not have believed Obama’s Volcker’s Rule would become law.  So, Volcker’s Rule alone did not create the fall.

The White House press release regarding Volcker’s Rule actually gives very little information.  And luck would have it that everything covered by Obama’s 01.21 announcement is already covered by H.R.4173 – Wall Street Reform and Consumer Protection Act of 2009.  Quite possibly, nothing is new. 

Worse, nothing is new: Glass-Steagall Act probably covered everything Volcker’s Rule is about.  Since Volcker’s Rule is not in the legislation form, no comparison can be done.  In fact even Volcker calls it “in the spirit” of Glass-Steagall Act.  It further proves that Obama named it Volcker’s Rule for political purposes: to show he is doing something to punish the bad guys (banks) for the rest of us. 

Preventing banks from having private equity funds, hedge funds et etc do decrease profits of the banks.  However, these funds make up 5% of revenues of Bank of America (NYSE: BAC), Citi (NYSE: C) and the like.  Yes, it does strengthen the point that this rule is for show, especially after the Massachusetts’ loss.  However, Volcker’s insistence on this issue has a point: it takes 5% of their revenue.  However, these banks are using depositors’ money to play these large bets, using FDIC’s insurance to back themselves up, and twisting their risk adjusted return on capital (RAROC).  Here is an example:  How much can $1000 bet if you were to trade on currencies?  Answer: with $1k, you can trade the equivalent of $100k of Japanese yen, British pound, Euro and so on.  If the currency fluctates 1%, the $1k is already gone.  If the market swings more than 1%, the bank has to lose all of its money (the $1k depositors’ money) and more.  So, these banks are misappropriating depositors’ money (which would be illegal in insurance laws), making taxpayers pay for their risk, and presenting themselves before the eyes of investors. 

What it really does is to draw out a lot of hot money from the market: less money will change hands on a daily basis.  That affects all industries.  Investors (institutional espeically) will have to play with real money, if this works.  Retail investors will make up a greater proportion of money in the market than before.  Market will be more difficult to be manipulated than before by a few players.  Will that shrink the whole market? Probably.  However (or hopefully), it will mean everyone will be trading with a saner head since no one will be playing with free money.

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January 25, 2010 - Posted by | banking, Current Events, Investment, legislation, market, Money, obama, opinion, Palin, politics, Thoughts, trading, US politics, wordpress-political-blogs

3 Comments »

  1. Hi there, glad to have found your site. I was just wondering if you could point out more specifically where you see H.R. 4173 covering the “Volcker rule” and the new size limits proposal? Here’s the text:

    http://www.opencongress.org/bill/111-h4173/text

    Comment by Donny Shaw | January 25, 2010 | Reply

  2. Donny,

    Glad you visited my site.
    NO, H.R. 4173 does not say the following:
    1) banks must split out proprietary trading and lending activites
    2) banks must be retain at a certain size

    my statement is that “luck would have it that….”

    4173 gives very general and broad statements to the regulation enforcement agencies. these statements are general enough that agencieis are able to expand their examination scope to include those activities.

    Comment by royho | January 25, 2010 | Reply

  3. here are a few examples:

    (2) subject a financial company to stricter prudential standards; and
    (3) require a financial holding company to undertake one or more mitigatory actions to address any grave threat its activities pose to the financial stability or economy of the United States…

    …Amends the Bank Holding Company Act of 1956 to prescribe requirements for the treatment of industrial loan companies, savings associations, special purpose holding companies, and certain other companies…

    …Amends the International Banking Act of 1978 to authorize the Federal Reserve Board to terminate the activities of the U.S. branch, agency, or subsidiary of a foreign bank that presents a systemic risk to the United States. …

    …Amends the Securities Exchange Act of 1934 to repeal the prohibition on regulation of security-based swaps and applies specified requirements to such swaps….

    Comment by royho | January 25, 2010 | Reply


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