On Thu, Aug 19, 2010 at 11:40 AM, wrote:
I am an analyst in the Employment Projections Program at the Bureau of Labor Statistics and am currently working on a report on the future of the financial industry. My main focus is the impact of the Dodd-Frank regulatory bill, and I would like to know your assessment of it:
1) Proprietary trading by depository institutions is limited to 3% of a depository firm’s Tier 1 capital. Could you give me a sense of how significant this is? How much are firms like Citibank and JP Morgan putting into proprietary trading now and how much will it have to decrease?
Banks are public private partnerships, part of the public infrastructure, established to promote public purpose.
I’m not sure I see any public purpose in prop trading, which means there shouldn’t be any.
But to your question, I’d guess it won’t but a material limitation.
2) The overall sense on the derivatives exchange is that the effect will be largely distributional. Information on prevailing prices used to favor major firms like Goldman Sachs, and this exchange will take that away, but it will probably allow for a greater volume of derivatives trading. Do you agree with this take?
Yes, to some degree.
I developed a futures contract for libor swaps many years ago that was quashed by the dealers when the LIFE tried to get it approved.
Also, if the Treasury or Fed had an unlimited securities lending program for all tsy secs the tsy market would replace much of the swap market as we know it, eliminate netting issues, and provide total transparency.
3) Capital requirements and leverage caps are left to the discretion of regulators and will likely follow the standards set by an international agreement. Do you have a sense of that these figures will wind up being?
No, but they miss the purpose of capital requirements, which is all about the pricing of risk when making loans, and nothing about ‘protecting taxpayers money’ which is what they all think it’s about.
So when it’s all being conceptualized incorrectly the odds of getting it right dwindle.
4) What will be the most important effects of the Consumer Financial Protection Agency? How significant is the decision whether or not to appoint Elizabeth Warren as its chief?
Not a bad idea if it’s done right, but, again, there seems to be no understanding of what banking actually is, which reduces the odds of getting it right.
5) The financial industry has seen rapid growth relative to the rest of the economy since the 1990s. Do you see anything in this bill that will slow down that trend?
The strength of the financial sector is a function of the strength of the real economy, and not the other way around.
I see nothing that will change that, so I expect the financial sector to grow as its ‘food supply’- the real sectors- recover.
Any insights would be greatly appreciated.
See my proposals here.