Last week another banker had his collar felt. Goldman Sachs employee Woojae Jung was arrested and charged in the US with insider trading.
Jung is accused of using confidential information on planned corporate merger activity, gathered from within Goldman’s investment banking department, to make secret trades in the companies involved. Jung, allegedly, knew which way the market was going to move when the information became public and personally positioned himself to profit from that.
Just another unremarkable tale of alleged corruption on Wall Street? Perhaps the significance is greater than that. For, by coincidence, last week also saw the Federal Reserve, America’s lead financial sector regulator, propose to water down the “Volcker Rule”, a centrepiece of the legislation enacted by the US in the wake of the global financial crisis a decade ago.
The Fed, led by recent Trump appointee Jerome Powell, is giving the banking lobby what it has been hollering for ever since the rule was introduced by the Barack Obama administration back in 2010.
What does the Volcker Rule, named after the former Federal Reserve chair Paul Volcker who designed it, do? It prevents Wall Street banks, such as Goldman, from “proprietary trading”, that is to say directly making bets on the movement of financial markets using their own money.
This might sound a bit odd to many people. Because isn’t this precisely what these financial institutions do to generate their profits and bonuses? The answer is no, at least in theory. These banks’ traders are supposed to facilitate foreign exchange and bond buying orders etc on behalf of their corporate clients.
While they can legitimately make a profit from such market making – pocketing the difference between what they buy the various assets for and what they sell them for – they are not supposed to nakedly speculate for their own institution’s profit.
There’s inevitably a grey area here: one traders’ speculation is another’s simple pre-emptive buying of assets to facilitate an expected future client transaction. Yet what Volcker did was to shrink the grey area considerably and make the speculation element considerably more onerous and expensive.
And rightly so given the catastrophic hidden risks banks turned out to have been running in the years before the financial crisis. Rightly, too, given the fact that these banks still benefit from a de facto taxpayer guarantee. There’s no case for publicly subsidised gambling – certainly not for underwriting gamblers with trillion dollar balance sheets.
The Jung allegations remind us why this functional separation is not only appropriate for banks but ethically necessary too. Wall Street banks have a hugely privileged position in the flow of financial information. Their investment banking divisions find out early about possible market moving mergers. Their share dealing and asset management divisions register big buy or sell order from clients which are likely to move markets simply due to their size. The opportunities for banks to profit from such information are vast.
It’s a testament to the degree to which banks like Goldman effectively wrote their own rules before the global financial crisis that regulators sat back and allowed them to gamble in such patently conflicted ways, even to the extent of having in-house highly-leveraged hedge funds.
The primary argument of the banking lobbyists is that the Volcker rule now constrains “liquidity” in financial markets, specifically because it limits banks’ ability to take positions in the assets they trade.
But the benefits of liquidity in financial markets for the wider economy are grossly exaggerated. Ordinary people do not turnover their pension share portfolios multiple times a day. Even large multinational corporations, which do need to buy and sell currencies and hedge themselves against rising interest rates regularly, really do not require the kind of hyper-liquidity that the banks are talking about.
As Denis Kelleher, the head of the Better Markets pressure group in Washington, puts it: “There is no evidence that the Volcker Rule has had any negative effect on financial activities related to the real economy.”
The real beneficiaries of hyper-liquidity in financial markets are speculators. And, of course, dealers, such as the large banks. The watering-down of Volcker is not about benefiting the US economy, but further boosting the profits of the large banks and the bonuses of their employees. And as we saw happen with the tight financial regulations that prevailed after the Second World War, such as the strict separation of investment and retail banking, Wall Street tends to play a long game of suffocation: breach the spirit of the law and then hollow it out gradually until there’s nothing left.
This is not just a tale of American folly. Where Wall Street treads in financial markets, history shows us that the City of London ultimately tends to rush in too.
Trump, readers might remember, campaigned as a champion of Main Street, accusing Wall Street of “getting away with murder”. He pilloried his opponent Hillary Clinton for once making a speech to Goldman for which she received $225,000. So effective was this anti-finance shtick that the whistleblower Edward Snowden even tweeted in February 2016 that the presidential election represented a dismal “choice between Donald Trump and Goldman Sachs”.
As the assault on the Volcker Rule confirms, this was one of the worst pieces of analysis of recent history. You can indeed have the nightmare combination of Donald Trump and Wall Street – and America is now getting it good and hard.