By Karl Denninger
You didn’t really think it was about the “art of compromise” or “the art of the possible”, right?
June 23 (Bloomberg) — Senate negotiators will probably offer changes today that would soften the Volcker rule by allowing banks to sponsor hedge funds and invest their own money, within limits, alongside that of clients.
Yeah, here we go. “Invest their own money”?
Uh, what money is that, precisely?
Banks, of course don’t have any of “their own money.” They have deposits, which are your money, and they have shareholders and bondholders paid-in capital, which is the shareholder’s and bondholder’s money.
The former’s money isn’t supposed to be theirs, and the latter’s wasn’t given to the bank for the purpose of playing in high-risk commodity, futures, and “high frequency trading” markets.
To the contrary: Banks exist to take the latter and use it to make loans to individuals and corporations, which secured by collateral then use that for various business and personal purposes.
This, incidentally, when used for “productive investment”, manifesting in the purchase of a machine that makes car parts, a building to run an air-conditioning business from or a truck used to haul goods from a farmer to the grocery store, is how one uses leverage – that is, borrowed money – to attempt to further economic expansion and common benefit for the entrepreneur (he or she hopes) and society as a whole (through the provision of those goods and services.)
There are, of course, other uses for leverage. Consumption, otherwise known as “A Hamburger today for money next Tuesday!” is one common (if, in the main, idiotic) use of same.
But then there is speculative leverage – that is, the use of borrowed money simply to speculate on the future price of a thing – whether it be houses, stocks, bonds, commodities or the outcome of a soccer match.
That latter act serves no productive purpose in the economy. Oh sure, if you’re right it can make you wealthy, but by definition for every winner in such a contest there is a loser, and what’s worse, the house always gets a cut.
As approved by the Senate last month, the Volcker rule, named after former Federal Reserve Chairman Paul Volcker, would ban U.S. banks from trading with their own capital and running hedge funds. It has been the target of last-minute lobbying by banks including Bank of New York Mellon Corp. and State Street Corp. The two banks are concerned that their asset-management activities would be curtailed, since many of their funds could be considered hedge funds although they don’t engage in risky bets, people familiar with the banks’ arguments said.
Of course it is.
After all, we would never have banks and other institutions that might have inside information on the things they bet upon, thereby being able to know the outcome of a horse race before it is run right? We’d never see, for example, BP’s problems with a rig in the gulf get reported to MMS, and then magically Goldman Sachs would sell a huge stake in the firm – a month before it blows up and sinks.
And we’d never have banks that are involved in the routing and allocation of capital to firms for productive investment able to bet on the outcome of those same firms, right? After all, if you could both make decisions on the routing of that capital and bet on the outcomes, you’d be able to know in advance whether the bets were good in at least some of the cases, yes? That could invite mischief of various forms, yes?
I’m sure we can trust our banks and other financial institutions to only act in the best interest of America in general and the firms that are dependent on them for financing and clearing services. After all, there would never be any sort of back-stabbing or worse, outright fraud in things like securitized debt, taking notes in blank, assigning them to more than one pool (thereby getting paid twice) and other similar things. There’s also no record of banks and other financial entities bribing people and worse in various funding markets, like GIC contracts and sewer projects for our state and local governments.
Any concerns about such behavior are obviously the rantings of someone who is a conspiracy nut, without any reference to actual recent events over the last few years.