Opinion

The Great Debate

Banks’ exposure to the Obama Plan

President Barack Obama’s proposals to ban banks from proprietary trading unrelated to serving their customers will have a very uneven impact on the sector.

There is no easy way to identify how much money the major banks make from proprietary trading rather than market-making, brokerage and hedging services on behalf of their customers. The banks do not break out their activities in this way, and the regulators do not collect standardised data.

But it is possible to identify which banks depend most heavily on trading rather than investment or commercial banking activities, and which are therefore potentially most exposed to a tightening of the regulations to prevent proprietary trading unrelated to serving their customers.

The attached charts (see here and here) show the 20 largest banks in the United States by average assets and the share of their adjusted operating income derived from trading activities in the first nine months of 2009. The numbers are taken from the Form Y-9C Consolidated Financial Statements which banks themselves file, published by the Federal Reserve in the form of Bank Holding Company Performance Reports (BHCPR), and used by federal bank supervisors:

Of the biggest banks, Goldman Sachs (55 percent) and Morgan Stanley (36 percent) depend far more than the others upon trading for the lion’s share of their adjusted operating income.

Obama disappoints on bank reform

— Peter Morici is a professor at the Smith School of Business, University of Maryland, and former Chief Economist at the U.S. International Trade Commission. The views expressed are his own. —

President Obama announced he wants to prohibit banks from forming hedge funds, private equity funds and trading securities on their own accounts, and he wants to limit the size of banks and financial institutions generally.

Hedge funds, private equity funds and proprietary securities trading did not cause the banks to get into trouble, and the size of banks did not cause the credit crisis.

from Commentaries:

Giving props to Wall Street’s risks

Wall Street would like you to believe that when investment banks take on risk they are largely doing it for the benefit of investors -- maybe even you and me.

Bankers say much of the capital that their firms put at risk each day is to complete trades for big corporations, mutual funds, pension funds, hedge funds and university endowments. And contrary to the conventional wisdom, proprietary trading -- bets made for a bank's own behalf -- is really just a small part of their business.

Lately, Wall Street's captains of capitalism have been aggressive in pushing the "we take big risks for our customers, not for ourselves" line of argument.

from Commentaries:

Citi’s dirty pool of assets

Hard as it may be to believe, shares of beleaguered Citigroup are on fire.

The stock of the de facto U.S. government-owned bank is up some 300 percent after it cratered at around $1 back in early March.

The over-caffeinated stock maven Jim Cramer keeps calling Citi a "buy, buy, buy" on his nightly CNBC television show. Even the more sober-minded writers at Barron's are pounding the table a bit, predicting Citi shares could double in price in three years."

Time out! It's far too soon for anyone but stock flippers and fast money hedge funds to buy Citi right now.

Matt Taibbi Is just plain wrong about Goldman Sachs

– Heidi N. Moore is a business writer in New York City. This article originally appeared in The Big Money. The views expressed are her own. –

bigmoneyCan one firm create a bubble? Can one firm create four bubbles?

Maybe, but it’s damn hard to prove. That’s why it’s so unimpressive that a fervent 10,000-word rant by Matt Taibbi in Rolling Stone’s July 9 issue-devoted purely to “Goldman’s big scam”-spent 12 pages on the subject of Goldman Sachs’ “Great American Bubble Machine” but never delivered any plausible proof. The mammoth article disappointingly failed to provide the smoking gun that so many people on Wall Street-who have envied and admired and hated Goldman for much of this decade-would have been delighted to see.

Context and good facts were in short supply in favor of a lively, if incoherent, narrative. As a fellow financial journalist put it: “If you read the article without knowing anything about finance, by the end you would still not know anything about finance-but you would hate Goldman Sachs.”

from Rolfe Winkler:

Buffett’s Betrayal

When I was 14, Warren Buffett wrote me a letter.

It was a response to one I'd sent him, pitching an investment idea.  For a kid interested in learning stocks, Buffett was a great role model.  His investing style -- diligent security analysis, finding competent management, patience -- was immediately appealing.

Buffett was kind enough to respond to my letter, thanking me for it and inviting me to his company's annual meeting.  I was hooked.  Today, Buffett remains famous for investing The Right Way.  He even has a television cartoon in the works, which will groom the next generation of acolytes.

But it turns out much of the story is fiction.  A good chunk of his fortune is dependent on taxpayer largess. Were it not for government bailouts, for which Buffett lobbied hard, many of his company's stock holdings would have been wiped out.

Goldman needs to lose Gekko image

jon_ford

– Jonathan Ford is a Reuters columnist. The views expressed are his own –

So, Goldman Sachs has a “Gordon Gekko feel to it” according to an executive at Brand Asset Consulting. In a survey of leading U.S. brands, the market research firm has reached the conclusion that the investment bank’s stature has been diminished in the eyes of the public by recent events.

Somehow, this fails to do justice to the emotions the name Goldman stirs in the breast of the average American.

from Commentaries:

Goldman’s real estate gambit

Matthew Goldstein.jpgIs history repeating itself at Goldman Sachs?

In late 2006, Goldman shrewdly began backing away from the residential mortgage market. With little fanfare, the firm began aggressively hedging its exposure to home loans, in particular mortgages to borrowers with shaky credit histories.

This savvy and somewhat stealthy strategy enabled Goldman to pawn off lots of its soon-to-be toxic mortgages and mortgage-backed securities on other institutions -- forcing those foolhardy speculators to pay the price when the subprime market blew up.

And much to everyone else's chagrin, Goldman even made money off the housing meltdown when some of its hedges -- specifically a bet that a subprime mortgage index would plunge -- paid off handsomely.

Was Goldman’s trading software stolen?

Matthew Goldstein–Matthew Goldstein is a Reuters columnist. The views expressed are his own.–

Did someone try to steal Goldman Sachs’ secret sauce?

While most in the United States were celebrating the Fourth of July holiday, a Russian immigrant living in New Jersey was being held on federal charges of stealing secret computer trading codes from a major New York-based financial institution.

Authorities did not identify the firm, but sources say the institution is none other than Goldman Sachs .

from Commentaries:

Goldman still puzzles

Matthew GoldsteinInvesting in Goldman Sachs still requires a leap of faith in the investment firm's ability to out-trade, out-wit and out-muscle everyone else on Wall Street.

Sure, the bulls will say that with fewer competitors and with the Federal Reserve keeping bank borrowing costs near zero, Goldman's traders should be able to print money. But here's the thing: The post-federal bailout version of Goldman is as much of an investing riddle as the pre-crisis Goldman that many critics called a giant hedge fund or an inscrutable black box.

Even after becoming a bank holding company last fall, Goldman still doesn't make it easy for investors to get their arms around all the firm's many moving pieces. Trying to get a clear picture of how Goldman makes all that money and where the risks to its profitability may be lurking is like embarking on a treasure hunt with a ripped map.

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