Bank earnings so far have been great.
Anybody taking even a cursory glance at earnings this week from JP Morgan (JPM) and Goldman (GS) can see huge profits in risk based trading offsetting weakness in their banking businesses. I think a model where one boring business gives you free capital to then go and risk in proprietary trading is very difficult to defend.
On the other hand, I think this is a necessary step to restore a little bit of risk taking in the market, and work to restore some kind of lending especially to small business.
Am I saying bring back Glass Steagall? No, of course not although things seemed relatively peaceful for 70 years while we had it.
A couple of points:
- While tolerable in the short term as a method to rebuild capital, proprietary trading and other high risk businesses needs to be separated from banking, not just in the US but world wide.
- The regulatory move to eliminate capital ratios was a grave mistake.
- If you strip out the proprietary trading from banks, you don't need to regulate huge bonuses because there won't be any.
- In terms of systemic regulation, debt and leverage ratios are the source of most bubbles. 50% of all debt bubbles are real estate debt related. Venture capital should not be regulated unless leverage is employed in the business (it currently is not except at the portfolio company level and it's usually minimal and low risk).
- Given the cyclical nature of the business, it seems unwise for Goldman to set aside record bonus levels. Would it not be better to set those earnings aside, in case turmoil does reoccur? At some point, one way or the other it will. You'd think there would be some memory of Goldman trading very low and facing severe liquidity concerns. It was just a year ago and we've forgotten?
- Starting a charity to do damage control on high bonuses seems unwise. Why not put the capital in reserve for a rainy day or defer it as long term compensation for a rainy day?
To appease the disclosure gods--Long JP Morgan, Goldman, BofA. Talking against my book.
