The results are in. Per the Dodd-Frank bill, the Government Accounting Office reviewed the profits and losses that six major banks experienced on their proprietary trading desks over the past 4 ½ years. The result? After slinging hundreds of billions of bonds, bills, and CDOs around the banks lost … wait for it … 221 million dollars.
That’s right: I didn’t miss a decimal. Their net losses were a couple hundred million. Less than they spent on their Bloomberg terminals, probably. Certainly less than the two and a half trillion dollars that have been lost since the onset of the financial crisis in August of 2007. It wasn’t proprietary trading that brought the global economy to a standstill, it was imprudent lending. Lending that wiped out capital, led to a massive capital crunch, and caused everyone to pull in their horns. The nascent recovery is a process of getting everyone to stick his or her head out one little bit at a time.
There’s a policy lesson here: trading and traders don’t kill banks. Bad loans kill banks. It was loans to Latin America in the ‘80s, commercial real estate loans in the ‘90s, and sub-prime pick-a-pay loans in the 00’s that threatened the bank that made the mortgage to finance the house that Jack built.
But there’s an investment lesson too: trading doesn’t work. If the best-paid people with gold-plated degrees using the fastest computers and the most sophisticated software can’t squeeze more out of the market than this, do you honestly think you can?
That’s why I’m an investor, not a trader. Because investments earn money by making everyone richer. Trading is only as good as the other guy is dumb.
Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!
Follow me on Twitter @GlobalMarketUpd