The Great Debate

Paul Volcker’s proposed ban on banks’ proprietary trading or owning hedge funds or private equity funds has been unexpectedly revived in the financial regulation bill published by Senate Banking Committee Chairman Christopher Dodd yesterday.

The Volcker Rule’s surprise survival comes despite fierce opposition from the banking industry and after many commentators had written it off as a short-term political gimmick in the wake of the shock election defeat in Massachusetts. Dodd himself had appeared lukewarm.

In fact, Section 619 of the bill (“Restrictions on Capital Market Activity by Banks and Bank Holding Companies”) would give legislative effect to the proposals almost exactly as outlined by President Barack Obama at the press conference in January.

BANS ON PROP TRADING, HEDGE FUND SPONSORSHIP
Section 619 (b) instructs the new Financial Stability Oversight Council (FSOC) to issue rules that “prohibit proprietary trading by an insured depository institution, a company that controls an insured depository institution or is treated as a bank holding company”.

That covers pretty much every major bank in the United States as well as former securities firms Goldman Sachs and Morgan Stanley that converted to bank holding companies and then financial holding companies to access Federal Reserve support at the height of the crisis. Just in case they are tempted to convert back, the bill contains another provision, Section 117, ensuring the rules apply to them anyway.

– John Kemp is a Reuters columnist. The views expressed are his own –

Unable to rely on the wounded consumer, the outlook for U.S. growth in the next three years depends on business investment and exports to take up the slack when stimulus programmes wind down.
Ultra-low interest rates will help. But with the economy struggling to work off a huge overhang of unused real estate assets, and not much sign of investment elsewhere, investment spending is set to remain sluggish, condemning the economy to a weak recovery in the medium term.

Federal Reserve Chairman Ben Bernanke and other senior U.S. officials have already warned the rest of the world can no longer rely on over-indebted U.S. consumers as the principal source of global growth. There is no choice but to rely on investment and exports to take up more of the burden.

– John Kemp is a Reuters columnist. The views expressed are his own –

President Barack Obama’s proposed curbs on bank size and proprietary risk-taking will be criticised for being vague, hard to implement, and focusing on issues that were only part of the cause of the recent crisis.

But the president should ignore self-interested counsels of perfection from the industry that aim to preserve the status quo. The plan is good politics, and good policy.
On the political front, the plan is a belated attempt to reposition the administration and congressional Democrats. It aims to channel the popular revolt that washed away Democrats in New Jersey and Virginia last autumn and now in Massachusetts.

– John Kemp is a Reuters columnist. The views expressed are his own –

LONDON – Yesterday’s announcement by Senator Byron Dorgan (Democrat, North Dakota) that he would not seek a fourth term in November, coupled with today’s expected announcement by Senator Chris Dodd (Democrat, Connecticut) that he won’t seek a sixth term, will remove two veterans, once secure legislators from the Democratic caucus.
It highlights the mounting problems confronting congressional Democrats facing voters in November’s midterms amid high unemployment, a relatively unpopular agenda led by the administration, and concerns about the party’s capture by special interests.

Dodd’s retirement is not surprising, given his plummeting poll numbers and criticism for being too close to the banking and insurance industries he regulates as chairman of the Senate Banking Committee but which have been major campaign contributors.

– John Kemp is a Reuters columnist. The views expressed are his own —

Households in the United States and the United Kingdom are about to experience a revolution in the way they pay for electricity.

Over the next decade, almost all homes will be fitted with “smart meters” recording the time as well as the quantity of electricity used. Most customers will face some form of dynamic pricing that relates the price they pay for each kilowatt hour (kWh) to the actual cost of generating it.

(John Kemp is a Reuters columnist. The views expressed are his own)

Warren Buffett’s acquisition of the remaining 77.4 percent of Burlington Northern Santa Fe (BNSF) railroad his Berkshire Hathaway does not already own looks like a strategic bet that America’s future energy needs will be met, in large part, through a massive expansion in coal-fired power generation coupled with carbon capture and storage (CCS).

Coal is the most important item moved on BNSF’s railroads. It accounted for almost half the tonnage moved by BNSF in the first nine months of the 2009 (214 billion revenue ton miles out of a total of 444 billion) and a quarter of the company’s revenues ($2.7 billion out of a total of $10.4 billion).

BNSF’s track and rights of way are perfectly positioned to benefit from a massive expansion of the country’s coal-fired output in the next 20 years, coupled with CCS technology to curb the carbon-dioxide emissions.

– John Kemp is a Reuters columnist. The opinions expressed are his own —

Perhaps the most frustrating aspect of much western comment on the unfolding crisis in Iran has been its over-simplification and lack of historical awareness. Perspectives are shaped by a single issue (western concerns about whether Iran is pursuing a nuclear weapons program) and the desire to draw a simple Manichean distinction between good guys (liberal-democrats) and bad ones (clerical-authoritarians).

The reality is far more complicated.

Part of the problem is a truncated sense of history. For most western commentators, the history of Iran’s troubled relations with the west starts in 1979 with the triumphant return of the glowering Ayatollah Ruhollah Khomeini at the head of the revolution which swept away Shah Reza Pahlavi’s western-backed regime and replaced it with a new Islamic Republic.

– John Kemp is a Reuters columnist. The views expressed are his own –

Economic history is the only field of human endeavor where the past changes as much if not more than the present and the future. Policymakers and practitioners struggle to define and write a “narrative” of the past as a means to control how policy responds to current and future problems.

The debate now over financial reform is a case in point. Even though the banking system has only just emerged from the most severe shock since the 1930s, the battle over how to define the events of the last 18 months, and what they should mean for investors and regulators in future, is already well underway.

– John Kemp is a Reuters columnist. The views expressed are his own –

Steady improvement in manufacturing surveys, payroll data and freight movements all indicate the U.S. economy is approaching the low point in the business cycle and should hit the bottom within the next one to four months. But that does not necessarily imply a strong and sustained expansion is about to get underway.

It is possible to be optimistic that the worst of the downturn is now over (or nearly so), while remaining cautious about prospects for strong and sustained recovery once the cyclical turning point is passed.

– John Kemp is a Reuters columnist. The views expressed are his own –

The current contango structure in crude oil futures and most other commodity markets — with future prices significantly above the spot market — is providing a strong incentive to buy and store record quantities of raw materials, with most of the cost borne by retail investors in exchange-traded funds and institutional investors in long-only commodity indices.

This “cash-and-carry” strategy rewards market participants with access to storage or finance at the lowest cost. It is providing huge profits for physical commodity merchants, investment banks, and the owners and operators of warehouses and tank farms during the downturn, and helps explain the record profitability from commodity operations reported recently by some of the largest banking and trading groups.