This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
See Cramer's multi-million dollar portfolio for FREE and get his new book Get Rich Carefully! Learn More

Banks' Glass-Steagall Walls Quietly Rebuilt (Update 1)

Volcker is aimed at getting banks out of prop trading, but Sanford Bernstein analyst Brad Hintz argued during the panel discussion Thursday that it may push them out of many critical aspects of market making as well.

Hintz, who covers Goldman and Morgan Stanley but not Jefferies Group (JEF) says he has a yellow post-it note with the name of the mid-sized securities dealer affixed to his computer screen.

"Will Jefferies come in and take the place of Goldman Sachs, JPMorgan, Bank of America and Citigroup? In time it may happen. What's happened to the economics of the business is pretty clear. As currently written, the Volcker Rule does a very significant negative job on fixed income," Hintz said.

Goldman Sachs CFO David Viniar argued in an investor presentation last month Goldman's return on equity would be helped by the Volcker Rule.

However, Hintz said in an interview following Thursday's the panel discussion that Viniar was "being cute," because while return on equity may be unchanged, he left out the fact that Goldman will, according to Hintz, allocate significantly less equity to fixed income trading.

10 Dow Dogs That Are Barking for Gains

In addition to Jefferies, Hintz expects "non-bank broker dealers to jump in," to provide what traders refer to as "liquidity," which refers to bonds trading in large quantities with relative ease and predictability.

Hintz said the new liquidity providers will be "Jefferies immediately," though he also mentioned private equity players Apollo Group (APOL) and KKR & Co. (KKR).

As a member of the audience asked whether hedge funds might also fill voids in the market left behind in the dealer community, Ed Provost, chief business development officer at the Chicago Board Options Exchange, was not overly optimistic.

"In the options business we love hedge funds, but I'd not look to hedge funds as a group I'd rely on. You need an organization whose primary role is the provision of liquidity. With all due respect, the hedge fund community is opportunistic," he said.

Rather than bringing in new players, another approach discussed by the panelists would be spinning off the securities arms of the giant banks just as Morgan Stanley and First Boston were spun out of banks in the wake off Glass Steagall. Such a move, however, would likely require Congressional intervention, argued James Brigagliano, a longtime Securities and Exchange Commission attorney now at Sidley Austin.

Regardless of the form it takes, breaking up the largest institutions is clearly on the minds of many who follow financial services companies as on Monday, financial services-focused investment bank Keefe, Bruyette & Woods chimed in with its own prediction of big bank breakups.

"At some point in the future, we would expect the current cycle to include public debate on the reduction in financial services and cuts in subsidies, particularly to Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB). We believe that the historical analysis suggests that investors should be prepared for the possible eventual break-up of the largest financials, including [Bank of America, Citigroup and JPMorgan]," the report stated.

At the moment, this discussion is still very hypothetical. Many of the largest institutions to emerge from the 2008 crisis are even larger now than they were at the time. But they are not immune to the new rules coming their way. There is lots of scrambling going on beneath the surface, and, for better or for worse, the financial services giants may be less powerful and immutable than they appear.

-- Written by Dan Freed in New York.

Follow me on Twitter

Stock quotes in this article: GS, MS, JEF, BAC, C 
Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
DOW 16,408.54 -16.31 -0.10%
S&P 500 1,864.85 +2.54 0.14%
NASDAQ 4,095.5160 +9.2910 0.23%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto
Advertising Partners

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs