When the Volcker Rule regulations go into effect next year, its restrictions could slam the revenue of the fixed income trading operations of several major U.S. banks by as much as 25%.
The Volker Rule is one of the elements required by the Dodd-Frank financial oversight law, which was written to rein in the sort of excessive Wall Street risk-taking that led to the financial crisis of 2008.
A draft version of the rule was released this week by the U.S. Federal Reserve, which was approved by both the Federal Deposit Insurance Corporation (FDIC) on Tuesday and the Securities and Exchange Commission (SEC) yesterday (Wednesday).
The rule aims to ban proprietary trading, in which the banks traded for their own benefit rather than for the benefit of their customers, but also will address other areas such as hedge fund investing.
Since a significant chunk of the big banks' profits - especially that of Goldman Sachs Group Inc. (NYSE: GS) and Morgan Stanley (NYSE: MS) - come from various forms of proprietary trading, the Volcker Rule stands to cost the industry billions in revenue.
To prevent cheating, complex compliance rules will require that banks prove that all their trading activities are for clients' benefit, and not proprietary. Compliance alone is expected to tack on another $2 billion in costs.
"[The Volcker Rule will] diminish the flexibility and profitability of banks' valuable market-making operations and place them at a competitive disadvantage to firms not constrained by the rule," noted a report by Moody's Corp. (NYSE: MCO).
The rule is named for former Fed Chairman Paul Volcker, who has made the case that such regulations are needed.
The new regulations will deal another blow to an already-struggling industry, which has watched earnings sag as a result of a falloff in equity trading volume, weak demand for loans, and costly legal headaches.
Although there's still time for the Volcker Rule to be tweaked before it takes effect on July 21, 2012, it will fundamentally change how the big banks operate.
The rule's impact on Goldman Sachs and Morgan Stanley will be particularly brutal, especially if the final version imposes broader restrictions.
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Investment Bank Earnings Preview: Giants Goldman Sachs and Morgan Stanley To See Revenue Decline
Citigroup Inc. (NYSE: C) spurred a big run in financial stocks yesterday (Monday) after the commercial-banking giant beat Wall Street estimates by reporting a huge surge in quarterly profits.
Don't expect the same exuberant response to U.S. investment bank earnings reports.
Indeed, Wall Street analysts are expecting a very different set of results from the U.S. investment-banking sector, when giants Goldman Sachs Group Inc. (NYSE: GS) and Morgan Stanley (NYSE: MS) report their third-quarter results this week. Goldman reports today (Tuesday) and Morgan Stanley tomorrow (Wednesday).
Analysts started reducing profit forecasts on the U.S. investment-banking sector back during the summer - and with good reason: Uncertainty about the strength of the economic recovery - and worries about the Bush tax cuts and the midterm elections - have led to a major drop-off in such important businesses as fixed-income trading.
Dealmaking volume - thanks to the spike in mergers and acquisitions - enjoyed an advance in August. And fees from bond underwriting could at least partly offset drop-offs in the equity-underwriting and advisory businesses.
But it won't be enough: As a result, analysts are forecasting an overall decline in investment-banking revenue from last year's third quarter.
Money Morning Mailbag: Tobin Tax the Only Solution to Problems Posed by High Frequency Trading
An episode of the television news program "60 Minutes" that aired Oct. 10 highlighted investors' fears over the growing trend of high frequency trading (HFT) run by a world of "supercomputers."
The "60 Minutes" piece prompted this letter from a reader wondering if the technological shift means it's time to readjust investment strategy.
Sunday night on "60 Minutes" they had a story about high-speed computers that are out-trading humans. Is it time to refocus on the world stage and find tangible rather than paper investments to put your money in? A partnership in a retail or manufacturing venue surely is more transparent than the stock market.
--RomanMoney Morning has been examining the effects of high frequency trading for years. In August 2009 Contributing Editor Martin Hutchinson said high frequency trading systems were front-running the market.
Banks Catch a Break with Long Timeline for Implementing Basel III Regulations
Global regulators on Sunday agreed on new banking capital requirements – known as Basel III – that were much less severe than expected, boosting global financial stocks as investors were optimistic about banks' ability to comply. The Basel Committee on Banking Supervision agreed on new rules that will more than triple capital requirements to give […]
JPMorgan Shuts Prop Trading Unit as Banks Maneuver Around the Volcker Rule
JPMorgan Chase & Co. (NYSE: JPM) became the first investment bank to take steps to comply with the so-called "Volcker Rule" by shutting down its proprietary trading unit.
JPM, the second-biggest U.S. bank by assets, told about 20 traders who work on its commodities trading desk that the company will close the unit, Bloomberg News reported, citing an anonymous source.
The bank eventually will close all in-house trading to comply with new U.S. curbs on investment banks, said the person, who asked not to be identified because New York-based JPM's decision hasn't been made public.
The Tobin Tax: The Deficit-Busting Levy Wall Street Hates
After the Nov. 2 midterm elections, the Obama administration and Congress are going to have to scramble to fill a trillion-dollar hole in the U.S budget, and tax increases may be the only option.
A tax increase won't be good news for an already wheezing economic recovery that seems to get weaker with each new report or indicator that's issued. But the type of tax that's chosen will go a long way in determining just how much damage the U.S. economy will have to endure.
With a deficit in excess of $1 trillion, there aren't a lot of options. One possibility would be to allow the 2001 and 2003 Bush tax cuts to expire, which would have a depressing effect on the economy and most people's pocketbooks.
But a better option would be to devise some new taxes that may prove less damaging. Indeed, there's even one possibility that might even do some economic good if it's implemented correctly.
It's called a "Tobin tax."
To see how a reasonably set "Tobin tax" could help U.S. leaders to fix the nation's finances, please read on...
Slowing Factory Output Suggests Global Economic Recovery May be Weakening
A slowdown in manufacturing growth spread across the globe in June, as factory output fell in China, Europe and the United States, suggesting the global economic recovery may be losing steam.
But the overall level of factory activity continued to expand, suggesting that manufacturers may be experiencing a return to more normal rates of growth rather than heading for a contraction.
In China, manufacturing growth slowed more than economists had forecast, and a gauge of factory output in the 16-member euro region fell for the second consecutive month, two surveys showed.
The Tobin Tax: The Fix-It Plan Wall Street Hates … But Can't Seem to Kill
German Chancellor Angela Merkel recently came out in favor of a "Tobin tax" - a small tax on financial transactions, proportionate to the size of the transaction. The Tobin tax idea also has been proposed by Britain's former prime minister, Gordon Brown, and was proposed in Congress by U.S. Rep. Peter DeFazio, D-OR.
Every time a Tobin tax is proposed, it has failed to gain traction - which isn't surprising: Wall Street, with its international affiliates and legion of lobbyists, hates the idea.
Even so, the Tobin tax idea just refuses to die - which is a good thing, since it is probably the best way of curing some of Wall Street's pathologies.
To understand how the Tobin tax can benefit investors, please read on...
Seven Cash Cows That Point the Way to Profit
In uncertain economic times, every investor needs a little extra cash in their pocket. These stocks should do the trick. We're not talking about commodity plays here, rather these "cash cows" are the companies with enough "moo-lah" to invest in their own growth... something that should definitely pay off in the long run for investors. Check out our "cash cow" stocks in this report.
Bankster Gangsters: Global Commodities Grab Causes Major Bank Profits to Soar
Major bank profits are up. Way up.
Goldman Sachs Group Inc. (NYSE: GS) just reported that its first-quarter earnings nearly doubled to $3.46 billion, the investment-banking giant's second-most-profitable quarter since going public a decade ago.
JPMorgan Chase & Co. (NYSE: JPM) recently said its first-quarter earnings came in at $3.3 billion, up 55% from a year ago.
And Bank of America Corp. (NYSE: BAC) reported that its earnings for the first three months of the year rang in at $2.83 billion.
For all three of these banking giants, the first-quarter results blew past analyst expectations. Their stock prices? Approaching levels not seen since the start of the financial crisis. In fact, JPMorgan's stock is within 10% of its five-year high.
Major bank profits are zooming - despite the fact that U.S. consumers are struggling to repay loans.
So how are these guys pulling this off? Well, if you dig, you'll find that the bulk of major bank profits are coming from stronger trading revenue and other segments that are enabling the largest banks to overcome weakness in the lending area, which decades ago was the banking sector's bread-and-butter business.
If you dig deeper still, as I've done, you unearth one of the key reasons these banking behemoths are booking such massive profits. They've been moving enormous amounts of capital into one area of the market.
I'm talking about commodities.
For an inside look at how banks can reap 15-fold returns on their physical-commodities stakes, please read on...