Brad Hintz believes in free markets. The one-time treasurer of Morgan Stanley and current equity analyst covering brokers, exchanges, and trust banks for Bernstein Research is as much a defender of an unshackled financial services industry as Dick Bove. So it should surprise no one that Brad Hintz thinks the Volcker Rule could be the death of all things cherished on Wall Street.
If you thought the story of the financial crisis was a harrowing one, then you should listen to Hintz trying to figure out a future with a Volcker Rule that's looking like it might be more onerous than previously thought. "We had originally estimated that the Volcker rules would reduce trading revenues by 10%," Hintz says. "Even if non-client pure risk-taking businesses were banned, that number was still relatively small." He's talking about proprietary trading desks, the majority of which have been closed down or spun off in the last two years. (See such actions by: Goldman Sachs (GS), Morgan Stanley (MS), and JPMorgan Chase.)
But new rules floated for industry consideration earlier this month were far more restrictive than previously expected. Even the ex-Fed chief himself is a little concerned about the growing complexity of the thing. In the original Dodd-Frank legislation, the rule was ten pages long. When the Office of the Comptroller of the Currency released the latest version for public comment between now and January 13, 2012, it was 298 pages, with more than 1,300 questions on 400 topics. At root is the issue of just what constitutes "proprietary trading" by banks, especially as it relates to the issue of making trades in securities on behalf of their customers. The simple goal that Volcker was trying to achieve was making sure that deposit-taking banks are forbidden from making proprietary bets with those deposits. But it gets really thorny when you try to define just what constitutes a proprietary bet.
Hintz argues the rules are taking dead-aim at the ability of investment banks to act in their vital role as market makers. "They will change the very business model of fixed income," he says."Risk-taking is very broadly defined and severely limited, and virtually all of the fixed income business is a risk-taking business. If banks are forced to shift to an order-taking business, revenue will drop 25% and margins will fall by a third."
Here's the thing, though: The proposals include an exemption for "bona fide" market-making on behalf of clients. If banks can't demonstrate why they're not making a house bet but instead acting on behalf of customers (i.e., "order-taking"), then they just might be engaging in the kind of risk-taking that got us in this mess in the first place. Sure, the request for comment is paint-peeling in its detail and legalise, but it's not as complicated as critics would have us believe.
Still, JPMorgan Chase (JPM) chief Jamie Dimon is concerned too. On a conference call with analysts this month, Dimon uttered another one of his unfiltered jewels. "The United States has the best, deepest, widest, and most transparent capital markets in the world which give you, the investor, the ability to buy and sell large amounts at very cheap prices. That is a good thing. I wish Paul Volcker understood that. Okay? Now we understand why there is no proprietary trading. That was fine….[But] we have to be in a position to do proper market-making for our clients…Most of our business is market-making…I hope all of you on this phone understand how important this is, not just for your own business but for future of the United States."
When Hintz is talking, it's just an industry under siege. When Dimon chimes in, he not only schools one of the country's most respected former chiefs of the Federal Reserve, but he also puts us on notice that nothing short of the future of the country is at risk. Really, Jamie? Come now.
