NEW YORK (
) -- Proprietary trading is in the spotlight these days, thanks to the new bank reform proposals by President Obama, but Wall Street's knee-jerk response -- that it did not cause the crisis -- requires further scrutiny.
CFO David Viniar set the tone during the company's fourth-quarter conference call last Thursday, which was
by President Obama's official announcement of his reforms.
"If people are focused on things that cause or were real contributors to the crisis, it wasn't trading. Most trading results were actually pretty good, not just at Goldman Sachs, but at most firms and that's not really where the problems were," Viniar said.
The Wall Street Journal
's editorial page Monday, Peter Wallison, a fellow at the
American Enterprise Institute
, took things a step further, writing "proprietary trading is a profitable business for many bank holding companies, and there is no evidence that it caused serious losses for either banks or bank holding companies in the recent financial crisis."
Well, gentlemen, let me beg to differ. Without being at all methodical about it, an hour or so of clicking around turned up the following:
recorded negative revenues of $16.9 billion in the fourth quarter of 2007 in a division it called Fixed Income Markets. In a footnote, Citigroup stated "lower revenues due to write-downs on non sub-prime securitized products and in fixed income proprietary trading."
shows $7.1 billion in trading losses under the heading "Principal Transactions" on its financial statement for the fourth quarter of 2007.
Bank of America
looks relatively brilliant in that same quarter, as it recorded
$1.8 billion in trading losses.
How much of the $62 billion
lost in the fourth quarter of 2008 should be attributed to proprietary trading is hard to say. AIG attributed $25.9 billion of it to "market-disruption related activities." That wording would be comical if AIG hadn't wreaked so much havoc. It almost sounds like AIG was intentionally in the business of market disruption.
's accountants used similar language in a less ironic way, disclosing $2.5 billion of "market disruption losses" including $1.2 billion of "securities impairments" and a $310 million "principal investing loss" in the third quarter of 2008, when Wachovia failed and was sold to
Federal Deposit Insurance Corp.
I won't wade into the balance sheets of
as I think I have made my point.
All of that said, Viniar and Wallison aren't wrong in a certain sense, according to the view of Dick Bove, analyst at Rochdale Securities. Bove argues proprietary trading was one of the end results of a chain of social and macroeconomic events rooted in the fact that the U.S. economy stopped producing things and became deeply indebted, causing an increase in the money supply. That led to a need to invest that money, accompanied by advances in technology, increasing complexity, and regulators who couldn't keep up and so essentially walked away, or deregulated.
"This is a multi-decade problem that started way beyond the financial system," Bove says. "The trading and the fraud and the greed in the banking system continued to move along, if you will, the direction toward a crisis. It was not at the beginning at the series of events that created the crisis, but it was certainly a factor in increasing the likelihood of the crisis."
As for whether proprietary trading should be banned, Bove argues "it doesn't matter." He says proprietary trading is extremely hard to define, and impossible to ban, as companies that want to trade will find a way around the rules -- even if that means moving outside the U.S.
"My whole problem with all this stuff is that we're not trying to get at the core reasons that the United States financial system is in trouble, or the United States economy is, and the core reason is that we keep buying products made elsewhere with borrowed money as opposed to producing products to sell elsewhere with invested money and, until we make that shift, we're screwed."
Written by Dan Freed in New York
When I wrote this story, called "The End of Proprietary Trading,"
three months ago
, I thought it sounded a bit wacky. I still think it's wacky, which is one of the reasons I think Goldman's stock looks attractive, as I explain