Video - Chris Whalen on Tech Ticker - Jan. 17, 2012
If you want to fix the problems on Wall Street, do what Kyle Bass suggests:
- Eliminate off-balance sheet assets
- Bring back Glass-Steagall
- And most importantly, cap leverage at 10X
On Wednesday, a subcommittee of the House Financial Services Committee is slated to hold a hearing on the so-called Volcker Rule. Named after the former Fed chairman, the rule calls for banks to stop trading their own funds (a.k.a. proprietary or "prop" trading), and cease investing in private equity funds or hedge funds.
"Why are we doing this now when we still haven't gotten the Congress to focus on where the problem was?," asks Whalen, senior managing director at Tangent Capital Partners and vice chair of Institutional Risk Analytics.
Far more that prop trading, Whalen says the 2008 crisis was caused by the origination, sales and marketing of mortgage-backed and related securities, a.k.a. the syndicate desk, which was aided and abetted by Fannie Mae and Freddie Mac. In addition, the lack of regulation on over-the-counter derivatives and abuse of leverage by financial firms were far bigger contributors to the crisis and resulting bailouts than were banks' prop trading desks, he says.
If the rule doesn't make the financial system any safer, Whalen says it has triggered the law of unintended consequences. Specifically, he says anticipation of the Volcker Rule has resulted in a loss of jobs, most notably at JPMorgan, and a loss of liquidity in the financial markets.
After Occupy Wall Street, few tears are going to be shed for a bunch of out-of-work traders. Meanwhile, the Fed is working overtime to provide ample liquidity. Still, there's no arguing with Whalen's point that our elected officials and financial regulators have blown a golden opportunity to reform the system.