Claim that rule will “kill” corporate bond market might be overstated.
Banks desperate to continue gambling with taxpayer monies unleashed their big guns on the Federal Reserve in early November to argue that the Volcker Rule would “kill” the corporate bond market. Bank ambassador extraordinaire Rodgin Cohen, along with officials from former wards of the state Goldman Sachs and Morgan Stanley, made the trip.
According to Bloomberg and the Financial Times, bankers are saying that the restriction on their ability to put more than 3 percent of their Tier 1 capital in prop trading, private equity or hedge funds will gut the corporate and Eurobond markets.
The notion is laughable, according to one trader. “Corporate business is all we’ll have left,” he said, meaning secondary market support for debt issues by clients is the only trading activity that banks will be able to perform in an unfettered way. As for the Eurobond market, where US banks have been big buyers for years, it’s hard to see the argument that US banks should have more exposure to those wobbly instruments now going down well with the Fed, which is charged with keeping them from blowing up again.
Coincidentally, the Fed itself announced another round of stress testing for the biggest US banks – to prevent that blow-up. The stress tests will be conducted to see if banks can withstand a “hypothetical global market shock” – e.g., specifically a shock like Eurozone break-up (see related story here). Bank of America, Citigroup, Goldman Sachs, J.P. Morgan Chase, Morgan Stanley and Wells Fargo & Co will all be subject to the tests.
Perhaps these tests will get the creative juices flowing in the search for more profits. That’s why the latest lobbying ploy beggars belief in another way – that a profitable opportunity will go unexploited simply because Goldman, Morgan Stanley or J.P. Morgan Chase can’t play in the game. With net investment flows into hedge funds still positive this year, despite a terrible third quarter, these institutions will continue to support the fixed income market, even if banks pull back.
Nonetheless, the story, which, appearing simultaneously in Bloomberg and the FT means it was most likely a PR plant, led Wednesday’s email alert from Wall Street lobby Securities Industry Association, (SIFMA). SIFMA ran a dark quote from another bank cheerleader, analyst Brad Hintz, the former Lehman Brothers CFO who was fined $200,000 by NASD for selling his Lehman shares while keeping a buy rating on the stock.