Volker Schmolker

Sent: Sunday, June 20, 2010 11:46 PM
Subject: Global Market Update

The “Volker Rule” is da’ bomb.

That’s what’s coming out of Congress. While I confess to having not read the entire 1500 page Financial Reform Bill, it looks like derivatives trading will no longer be part of a bank’s activity.

Only, it wasn’t their derivatives activities that got the banks in trouble.

Sure, Barings Bank was taken down by a rogue futures trader named Nick Leeson who operated out of Singapore. But that was a compliance problem—everyone knew Leeson wore too many hats. And sure Societe Generale lost $7 billion due to unauthorized equity trading by Jerome Kerviel. But this was a guy who hacked SocGen’s system to get his trades in.

No one thinks that legitimate derivatives trading brought down the banks. It wasn’t their trading, it was their lending. The banks made too many aggressive loans to marginal borrowers and held too many securities backed by these same loans. When the real-estate bubble burst, that took down the mortgages, securities, and the banks that held them.

The Financial Reform bill seems to be just so much theater, giving the impression of reform without really changing a thing. It may encourage Goldman to settle with the SEC, but it doesn’t look like it will change much.

There are ways that our banking system could be improved. But the “Volker Rule” isn’t one of them.

Douglas R. Tengdin, CFA
Chief Investment Officer
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