950 shades of grey

By Ben Walsh
December 5, 2013

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The latest apparent victim of the London Whale has a slightly less memorable name: portfolio hedging. The WSJ reports that the final version of the Volcker Rule won’t contain language allowing the practice of hedging broad portfolios of assets against economic shifts. Treasury Secretary Jack Lew says the “rule prohibits risky trading bets like the ‘London Whale’ that are masked as risk-mitigating hedges”.

The Volcker Rule is tantalizingly close to finalization, clocking in at some 950 pages, after a more than three-year drafting process, but how it will be implemented is an open question. At the five largest Wall Street banks, the rule could threaten business units that accounted for $58 billion in revenue over the last twelve months. That’s 18% of their collective revenue, Bloomberg writes.

Still, Guggenheim Securities’ Jaret Seiberg thinks regulators are intentionally overstating the actual strength of the rule. “The vast majority of banks” will be exempt from having to demonstrate compliance with the portfolio hedging portion of the rule, says Seiberg.

KBW’s Brian Gardner and Fred Canno fear enforcement of the rule might end up being more important than the text itself: “A broad definition of prop trading (with narrow exemptions) that is aggressively enforced could be the worst outcome for the largest banks”.

Matt Levine points out that removing a phrase is not the same as prohibiting a practice. Given the current language of the rule, portfolio hedging by another name may be permitted:

Eliminating the words “portfolio hedging” is not the same as eliminating portfolio hedging. The rule allows hedges “designed to reduce or otherwise significantly mitigate … one or more identifiable risks,” as long as they don’t create “any significant new or additional risk that is not itself hedged contemporaneously.” So it is not entirely clear to me from that that the rule forbids “portfolio hedging”.

– Ben Walsh

On to today’s links:

Leaders
Vanity Fair profiles Marissa Mayer, includes must-see yearbook photo featuring a propeller beanie - Bethany McLean

Interesting Failures
An oral history of BlackBerry’s utter implosion - Bloomberg Businessweek

Primary Sources
Obama on inequality: his best speech to date on the economy - White House

Best And Brightest
Congress guts PE regulation and the “big takeaway… is that the bill’s primary sponsor has no idea what he’s talking about” - Dan Primack
House passes bill exempting PE funds from SEC registration and reporting - Reuters

Comparisons
Brazil is kind of the economic inverse of the US - Justin Fox

Decline and Fall
Dennis Kozlowski’s current job description: preparing proposals, proofreading and copying - Will Alden

Popular Myths
No, there is no housing bubble - Bonddad

TBTF
Is BlackRock too big to fail? - Sheila Bair

Right On
“Smarm should be understood as a type of bullshit” - Tom Socca

That Just Like Your Opinion, Man
JP Morgan and Morgan Stanley have different thoughts on junk bonds - Bloomberg

Billionaire Whimsy
Carl Icahn goes to bed at 8am, or he is very confused by time zones - Time

Modest Proposals
The Volcker Rule and the King James Bible - Euromoney

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