The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.NEW YORK ( TheStreet) -- When Dodd-Frank was enacted on July 21, 2010, nobody was happy. I did not believe the
Key Provision: The Volcker RuleFormer Treasury Secretary Paul Volker does not believe banks should be allowed to trade for their own account -- too risky. It is interesting to look at how his influence ebbed and flowed during the bill's development. Just after the bank collapse, everyone was looking to Volcker on what should be done. Obama seemed quite taken with him. But Larry Summers, Tim Geithner and their buddies in the financial industry did not want the Volcker Rule in the bank reform bill, so all of a sudden, he was no longer a White House regular. But in Congress, his influence remained strong -- Barney Frank, Carl Levin, et al. So where is Volcker in the bill? Title VI, Sec. 619, (a)(1) reads: "Unless otherwise provided in this section, a banking entity shall not -- (A) engage in proprietary trading; or (B) acquire or retain any equity, partnership, or other ownership interest in or sponsor a hedge fund or a private equity fund. ... In no case may the aggregate of all of the interests of the banking entity in all such funds exceed 3% of the Tier 1 capital of the banking entity." That sounds pretty good. So let's look at this from some other perspectives.
Developments in the Banking IndustryIn 1951, U.S. financial profits were 8% of total corporate profits. By 2003, the financial share had increased to 33%. One Third! In 2010, after the bank collapse, they were still 26% of total U.S. corporate profits. What impact has the legislation had, or is it expected to have? Gabriel Sherman just interviewed a number of bankers on this question. In a New York Magazine article, he reported that the
- A quote from JPMorgan Chase CEO Jamie Dimon: "Certain products are gone forever. ... Fancy derivatives are mostly gone. Prop trading is gone. There's less leverage everywhere. Mortgages are back to old-fashioned conservative mortgages. ..." Sherman on Goldman Sachs: "Months before the Volcker Rule is set to kick in, star traders began to leave in droves. In March 2010, Pierre-Henri Flamand, the London-based global head of Goldman's Principal Strategies group, quit. ... In September, Goldman revealed it was shuttering its entire desk. ... Goldman was the first of the major banks to announce it was shuttering its internal hedge funds." Sherman on Morgan Stanley: "Morgan Stanley announced ... it was getting out of prop trading entirely. The bank decided to spin off its secretive Process Driven Trading unit, a 70-person desk run by Peter Muller. ... After disbanding Muller's group, Morgan Stanley announced it had finished spinning off FrontPoint Partners, a multibillion-dollar hedge fund. ..." On Citigroup: "Citigroup announced that it, too, was closing its prop-trading desk."
Federal Deposit Insurance Corporation Bank DataThe Sherman article certainly gives the impression that Dodd-Frank has teeth and that a real deleveraging revolution has started in the banking industry. But before accepting this as fact, let's look at September 2011 FDIC data on banks. Table 1 provides information on the four largest U.S. banks. The table includes values for the end of September 2011 and the percent change since June 2007 (before the banking collapse). It appears the big banks are getting bigger:
- Employment has grown significantly for all but Citibank. Total assets are up as well, with each bank having more than $1 trillion (note there are only 15 countries with GDPs in excess of $1 trillion). The banks are getting out of trading? Why then, for all but Bank of America, are trading account assets up? Why then, for all but JP Morgan Chase, are derivatives up significantly?
Another Look at Dodd-FrankBut let's return to Dodd-Frank. While there is Volcker language in it, the bill also says in Title VI, Sec. 619, (b)(1): "Not later than 6 months after the date of enactment of this section, the Financial Stability Oversight Council shall study and make recommendations on implementing the provisions of this section so as to -- (A) promote and enhance the safety and soundness of banking entities. ..." In short, the bill calls for federal financial regulators to study the measure, and then issue rules implementing it, based on the results of that study. Just after the bill was enacted,
- "...Brett P. Barragate, a partner in the financial institutions practice at the law firm Jones Day, estimated that Congress had fixed in place no more than 25 percent of the details of that vast expansion. ... Interest groups have been preparing for months. When the Consumer Bankers Association convened its annual meeting in early June, there was still plenty of time to lobby Congress. But the group's president, Richard Hunt, told his board that the group should shift its focus to the rule-making process. The board voted to increase the group's budget and staff. 'Now we hope to have a good give and take with the regulators on the best interests of the consumer and the industry,' said Mr. Hunt. ... One clear consequence is a surge in the demand for lawyers with expertise in financial regulation, particularly those who have worked for regulatory agencies. Most of the major trade groups are hiring lawyers. The major banks say they are employing more, too."