In the run-up to the vote on the financial overhaul bill, the big Wall Street banks squashed an attempt by Sen. Carl Levin, D-Mich., to pass a simple ban on any form of proprietary trading.
A Senate staffer close to the process told me the bill was one of Wall Street’s highest priorities, spreading money around to exert as much pressure as possible.
It worked: Levin’s amendment never reached the Senate floor for a vote. The final version of the bill restricts proprietary trading but allows big Wall Street firms to invest as much as 3 percent of their capital in their own internal hedge funds. How exactly the new rules are enforced is left to regulators inside the Federal Reserve, but it’s not hard to see how a wholly owned hedge fund might become a proprietary trading group, with a different name.
Yet in just the past few weeks news has leaked that Morgan Stanley, JPMorgan and Goldman Sachs all intend either to close their proprietary trading units or to sell their interests in the hedge funds they control.
Obviously, something is wrong with this picture. Why fight for a right, and win, only to proceed as if you have lost? Having preserved their loophole, big American banks now appear to be abandoning any attempt to exploit it.
To see Wall Street turn its back on money is as unsettling as watching a shark’s fin veer away, and then sink from view. It leaves you wanting to know where the shark has gone, and why.
None of the firms have offered a good explanation for their new and seemingly improved behavior, but it’s not hard to think up several. From least plausible to most:
• Having not merely preserved but bolstered their place at the heart of capitalism, the major Wall Street firms have experienced an epiphany about their relationship to wider society.
Newly able to raise their prices, they want to return to serving their customers, rather than exploiting them.
The only problem with this explanation is that I don’t believe it. More likely:
• The big Wall Street firms have looked anew at proprietary trading and seen a dying business.
For a start, their proprietary traders, put off by subpoenas and government inquiries and the new internal aversion to short-term pain on big trading positions, are fleeing for the privacy of hedge funds.
But the exodus of trading talent is only part of the problem. A general malaise has come over the world of big-time, financial risk-taking. Everywhere you look hedge funds are either closing or shedding employees or, most shockingly, cutting their fees. At the bottom of this depressing new trend lies a deeper problem: a scarcity of suckers.
Prop trading isn’t as promising as it used to be. At the same time, it’s a far greater nuisance than it ever was: The regulators might actually be paying attention to what your traders get up to. If they screw up, the financial press is poised to write a story about them.
It’s just not worth the trouble to prop trade, unless you can prop trade in some wholly novel way. Which brings us to a third possible explanation:
• Goldman Sachs, Morgan Stanley and JPMorgan are not in fact abandoning proprietary trading. They are just giving it a different name.
They are dismantling the units called “proprietary trading” and shifting the activity onto trading desks that deal directly with customers.
After all, you don’t need a proprietary trading desk to engage in the two activities that any proprietary trading ban would seek to prevent: 1) running huge trading risks, and 2) taking the other side of the customers’ stupid trades. Goldman Sachs’ infamous Abacus program – the one that talked American International Group into selling vast amounts of cheap insurance to offset subprime mortgage risk, and then shorted the instruments they themselves had created – wasn’t dreamed up by the prop trading desk. It was the brainchild of what customers knew as the “Client Facing Group.”
What’s really striking is how little ability the outside world retains to find out what is going on inside these places.
And yet news of the death of the Wall Street prop trader has been greeted with hardly a peep. And I wonder: is this the nature of our new financial order? Big decisions, in which the public has a clear interest, being made outside public view, with little public discussion or understanding. •
Michael Lewis is a columnist for Bloomberg News.
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