To see Wall Street turn its back on money is as unsettling
as watching a shark's fin veer away, and then sink from view. It
leaves you wanting to know where the shark has gone, and why.
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The Mystery of Disappearing Proprietary Traders: Michael Lewis
2010-09-30 01:00:00.1 GMT
Commentary by Michael Lewis
Sept. 30 (Bloomberg) -- In the run-up to the vote on the
financial overhaul bill, the big Wall Street banks squashed an
attempt by Senator Carl Levin to pass a simple ban on any form
of proprietary trading.
A Senate staffer close to the process told me the amendment
was one of Wall Street's highest priorities, spreading money
around to exert as much pressure as possible.
It worked: Levin's amendment never reached the Senate floor
for a vote. The final version of the bill restricts proprietary
trading but allows big Wall Street firms to invest as much as 3
percent of their capital in their own internal hedge funds. How
exactly the new rules are enforced is left to regulators inside
the Federal Reserve, but it's not hard to see how a wholly owned
hedge fund might become a proprietary trading group, with a
different name.
The 3 percent loophole amounted to an invitation for the
big banks to keep on doing at least some of what they had been
doing -- which is why Levin felt compelled to remove it, and the
banks fought so hard to keep it.
Yet in just the past few weeks news has leaked that Morgan
Stanley, JPMorgan and Goldman Sachs all intend either to close
their proprietary trading units or to sell their interests in
the hedge funds they control.
Obviously, something is wrong with this picture. Why fight
for a right, and win, only to proceed as if you have lost? Why
take prisoners only to surrender to them? Having preserved their
loophole the big American banks now appear to be freely
abandoning any attempt to exploit it. (Credit Suisse, on the
other hand, just bought a stake in a hedge fund.)
Shark Watch
To see Wall Street turn its back on money is as unsettling
as watching a shark's fin veer away, and then sink from view. It
leaves you wanting to know where the shark has gone, and why.
None of the firms have offered a good explanation for
their new and seemingly improved behavior, but it's not hard to
think up several. From least plausible to most:
No. 1 -- Having not merely preserved but bolstered their
place at the heart of capitalism -- with little banks failing
everywhere, the big keep getting bigger and stronger -- the
major Wall Street firms have experienced an epiphany about their
relationship to wider society. They don't need to screw people!
Newly able to raise their prices, they want to return to
serving their customers, rather than exploiting them.
Whatever they lose from prop trading they will be more than
compensated for through new and more trusting relationships with
their clients -- who will now have no reason to suspect they are
merely a tool for the firm's trading desk.
Nice Guys
In a smaller and less competitive financial industry, it
will pay to be the nice guy, and so Goldman Sachs now wants to
play nice.
The only problem with this explanation is that I don't
believe it. More likely:
No. 2 -- The big Wall Street firms have looked anew at
proprietary trading and seen a dying business.
For a start, their proprietary traders, put off by
subpoenas and government inquiries and the new internal aversion
to short-term pain on big trading positions, are fleeing for the
privacy of hedge funds.
But the exodus of trading talent is only part of the
problem. A general malaise has come over the world of big time
financial risk taking. Everywhere you look hedge funds are
either closing or shedding employees or, most shockingly,
cutting their fees. At the bottom of this depressing new trend
lies a deeper problem: a scarcity of suckers.
Find the Fool
The proprietary trading business turns in part on one's
ability to find the fool -- to find people willing to take the
stupid side of the smart bets you are placing. One of the side
effects of our seemingly endless financial crisis is to wash a
lot of fools, many of them German, out of the game.
It's as if a casino owner awakened one morning to find the
tourists had all gone, and the only remaining patrons are pros
counting cards at his blackjack tables. As he looked around his
casino, for the first time in his life, he couldn't find the
fool. And the first rule of the casino business is: if you don't
know who the fool is, it's probably you.
Prop trading isn't as promising as it used to be. At the
same time it's a far greater nuisance than it ever was: The
regulators might actually be paying attention to what your
traders get up to; if they screw up the financial press is
poised to write a story about them; and so on.
Not Worth It
It's just not worth the trouble to prop trade, unless you
can prop trade in some wholly novel way. Which brings us to a
third possible explanation:
No. 3 -- Goldman Sachs, Morgan Stanley and JPMorgan are not
in fact abandoning proprietary trading. They are just giving it
a different name.
They are dismantling the units called "proprietary
trading" and shifting the activity onto trading desks that deal
directly with customers. (Which would explain why so few prop
traders are being let go.)
After all, you don't need a proprietary trading desk to
engage in the two activities that any proprietary trading ban
would seek to prevent: 1) running huge trading risks, and 2)
taking the other side of the customers' stupid trades. Goldman
Sachs' infamous Abacus program -- the one that talked American
International Group into selling vast amounts of cheap insurance
to offset subprime mortgage risk, and then shorted the
instruments they themselves had created -- wasn't dreamed up by
the prop trading desk. It was the brainchild of what customers
knew as the "Client Facing Group."
In short, there are any number of explanations why Wall
Street firms are all at once letting it be known they intend
simply to walk away from what has been, until very recently,
their single most lucrative line of work.
None of the Above
The answer may be none of the above or some mixture of the
three. But what's really striking is how little ability the
outside world retains to find out what is going on inside these
places -- even after we have learned that what we don't know
about them can kill us.
It would be nice to know, for instance, if the big banks
are making these moves with the tacit understanding that the
regulators, going forward, won't be looking too closely at the
activities of the "Client Facing Group."
And yet news of the death of the Wall Street prop trader
has been greeted with hardly a peep. And I wonder: is this the
nature of our new financial order? Big decisions, in which the
public has a clear interest, being made outside public view,
with little public discussion or understanding.
If so, it isn't a future at all. It's just the past,
repeating itself.
(Michael Lewis, most recently author of the best-selling
"The Big Short," is a columnist for Bloomberg News. The
opinions expressed are his own.)
For Related News and Information:
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For more commentary: OPED <GO>
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--Editors: Marty Schenker, James Greiff.
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