Wednesday, September 01, 2010
Banks can no longer gamble with their own money in the stock market as a result of new rules imposed by Congress. But there’s nothing that says financial institutions can’t take the same risks with other peoples’ money.
Proprietary trading is out for banks, but the new federal law does not address speculation done on behalf of a client. Institutions like JPMorgan Chase and Goldman Sachs are continuing the practice, and losing substantial sums in the process—$100 million each from April to July of this year.
Taking risks, even if it’s not the banks’ money, can be potentially dangerous for the industry and the economy. After all, it is exactly this type of market gambling helped produced the 2008 financial crisis.
“You can use client activity as a cover for basically anything you are doing,” Janet Tavakoli, head of Tavakoli Structured Finance consulting firm, told The New York Times. “It’s very problematic that losses like this are showing up. It’s a prime example of what the financial reform bill doesn’t address.”
-Noel Brinkerhoff
Despite Reform, Banks Have Room for Risky Deals (by Nelson Schwartz and Eric Dash, New York Times)
House Financial Reform Bill: The Good, the Bad and the Ugly (by Noel Brinkerhoff, AllGov)
10-Year Anniversary of the Bill That Led to the Current Economic Crisis (by Noel Brinkerhoff and David Wallechinsky, AllGov)
Financial Reform Lite: No Glass-Steagall This Time Around (by Noel Brinkerhoff, AllGov)
Financial Reform: We May Be Stuck Paying for the Breaks Banks Bought (by Noel Brinkerhoff, AllGov)
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