New banking rules in the US, discussing the new Volcker Rule.

There are six big arguments against the Volcker Rule. Here’s why they’re wrong..

exerpt…

Today is the day we finally get to see the Volcker Rule, the new regulation that aims to prevent banks from engaging in speculative trading activity. (See here for an overview.)

Paul Volcker, former chairman of the U.S. Federal Reserve. (Bloomberg)

In all the excitement, a lot of commentators have been writing posts arguing that the Volcker Rule is either unnecessary or perhaps even counterproductive. Both Matt Levine and Tyler Cowen have summed up these cases well.

There are usually six different complaints about the Volcker Rule. By addressing them, we can lay out the case for why this rule is important and worth strengthening. I’ll take the complaints in order from least to most important:

1) “The Volcker rule isn’t a fix-all for Wall Street’s ills, and it might not even be a necessary component of reform. Why are we bothering to do this complicated thing?”

Let’s back up: The Dodd-Frank Act included a series of reforms that were designed to reinforce each other. The ultimate goal is to build a financial system that helps the real economy while also both preventing future crises and having the correct tools to deal with crises when they do happen.

In order to limit the government’s need to act as a safety net during a crisis, regulators are creating various tools that try to do three big things: First, the financial sector will have to internalize some of the costs of crises and insurance. Second, there’s more supervision of banks through things like capital requirements. Third, there are limits on the sorts of activities the banks can do.

The Volcker Rule mainly focuses on the third component — it prevents banks from engaging in “proprietary trading,” which essentially removes the parts of banks that gamble and act like hedge funds, because those parts can blow up quickly (see here for more).

It’s also a conceptual and cultural shift: Banks need to be boring again and focus on their core business lines. As Marcus Stanley of Americans for Financial Reform wrote, the Volcker Rule creates “a new definition of the dealer or market maker role that is more stable and reliable due to the removal of proprietary trading incentives.” This role will still support lending and credit but will also create a new “reliable utility role for dealer banks in the financial markets.”

That’s all just to say that there’s no one single “fix-all” reform here. All three components of financial regulation need to hang together. That involves a well-capitalized banking sector with high leverage, liquidity, and risk-adjusted capital. It also involves a sane over-the-counter derivatives market. And it requires a credible mechanism to force losses on to investors at firms that were previously “Too Big To Fail.” Those components have to work together.

2) “That’s fine, but seriously, this rule would have done nothing useful in solving the last financial crisis. It’s a solution in search of a problem.”

Perhaps. But “solving the last financial crisis” is only one of many goals here. There are other problems that the Volcker Rule does address, at least in part:

First, take resolution authority—the legal regime that’s designed to wind down very large banks and institutions that run into trouble. By preventing banks from engaging in proprietary trading, the Volcker Rule actually makes this task easier. Proprietary trading is notorious for creating quick, large losses, which makes it harder for regulators to deal with failing institutions (resolution authority typically involves nudging banks to better capital while giving regulators the tools necessary to take over failing firms—see more here).

The Volcker Rule also works in concert with other reforms, providing a backstop if those rules don’t work out. If derivatives regulations turn out to be insufficient, for instance, then the Volcker Rule still prevents large banks from carrying out huge bets on tail risk through the derivatives market.

The Volcker Rule would have also helped make the last financial crisis less extreme. “Certainly proprietary positioning played a role in the crisis,” says Caitlin Kline, a former derivatives trader who now works at the non-profit Better Markets. “Banks amassed inventories of high-yielding highly-rated products with largely overnight funding, and this street-wide carry trade helped cause a massive liquidity crisis and then solvency issues, which was a major factor. The Volcker rule will absolutely affect most front-office desk’s ability to warehouse huge positions like that.”

more insights into gold prices

more insights, speculation that more gold sales are expected from southern europe, and an intriguing list of who holds gold and China nor India are near the top!,

Gold prices may have just plummeted by double-digits — the biggest percent sell-off in four decades — but some of the world’s central banks are still buying up large amounts of the precious metal. Specifically, the central banks of six countries are adding gold to their official foreign reserves, according to The World Gold Council’s most recent report on global central bank holdings. These six nations have purchased large amounts of gold so far in 2013 or throughout 2012. And if their buying continues, their gold demand could offset some of selling pressure (which has driven gold price to below $1,400) in the future. Some nations may indeed continue buying because of central bank or currency issues. Of course, a major market concern is that Cyprus is now likely a gold reserve seller. The World Gold Council shows that Cyprus’s 2013 gold reserve is only 13.9 tonnes, which is 61.9% of the small nation’s total foreign reserves. Concerns about selling from Cyprus are compounded by worries that larger troubled nations, including Italy, Portugal and Spain, may start selling gold to either raise capital or because of the existing Central Bank Gold Agreement sale programs. However, it does not appear that there is panic selling among most of these nations, so that effect can be discounted for the time being. The six nations that could offset or at least mitigate gold sales by other central banks, institutions and individuals are Russia, Turkey, South Korea, Brazil, Kazakhstan and Iraq. In its analysis, 24/7 Wall St. has avoided specific speculation on why these nations may be acquiring gold because the reasons may differ from country to country. It is worth noting is that the World Gold Council report evaluates central bank holdings and does not include investor and industrial demand in any of the countries. As recently as February, the World Gold Council showed that global central banks had bought the most gold since 1964. But India and China were no longer the demand mechanisms they had been in the past. Many of the official central banks’ gold holdings of large nations, based on gross domestic product (GDP), are nearly the same as they were in 24/7 Wall St.’s last report: The 13 Countries That Own the World’s Gold. But if that changes and some of the troubled nations actually sell gold as a source of funds, then it be beyond the scope of retail investors and speculators to help keep gold price at even the current depressed levels. Here are nations with largest gold reserves as measured by tonnes. This list includes the International Monetary Fund and the European Central Bank. The United States (#1) was static at 8,133.5 tonnes Germany (#2) was down slightly at 3,391.3 tonnes (April 2013), versus 3,401.8 tonnes in late 2011 The International Monetary Fund (#3) was static at 2,814 tonnes Italy (#4) was static at 2,451.8 tonnes France (#5) was static at 2,435.4 tonnes China (#6) was static at 1,054.1 tonnes Switzerland (#7) was static at 1,040.1 tonnes Russia (#8) increased reserves from 851.5 tonnes in late 2011 to 976.9 tonnes (April 2013) Japan (#9) was static at 765.2 tonnes The Netherlands (#10) was static at 612.5 tonnes India (#11) was static at 557.7 tonnes The European Central Bank (#12) was static at 502.1 tonnes Taiwan (#13) was static at 423.6 tonnes Portugal (#14) was static at 382.5 tonnes 24/7 Wall St. has analyzed the World Gold Council data and added comments on how and why the central banks of Russia, Turkey, South Korea, Brazil, Kazakhstan and Iraq could act as the stabilizing mechanisms for gold if selling pressure continues. If history is a measure, it seems highly unlikely that retail buyers and speculators will start another wave of gold purchases. Central banks buy gold in support of their currencies, and the recent massive drop may give the central banks that can a chance to increase their gold holdings. GDP and population estimates were both taken from the CIA World Factbook.

via Countries Buying the World’s Gold – 24/7 Wall St. – Mozilla Firefox.

Gold price drop due to shorting by big players

Even within the fund administration layer there is a grapevine of sorts. For example, you are probably unaware of this fact – 75% of all Wall Street professionals involved with prime brokerage were former college lacrosse players. It’s true, based on my estimates. Three out of four guys who work prime brokerage for JPMorgan, Goldman etc were Brothers of the Stick. They all get each other jobs upon graduation, year after year, and before you know it, here we are! The entire trade execution and settlement complex would collapse in on itself if not for the predominantly east coast and mid-Atlantic fraternity of Lacrosse Bros who keep the machinery in motion.

Anyway, my point is, everybody talks.

And over the last week or so, the one rumor I keep hearing from different hedge fund people is that George Soros is currently massively short gold and that he’s making an absolute killing.

Once again, I have no way of knowing if this is true or false.

But enough people are saying it that I thought it worthwhile to at least mention.

And to me, it would make perfect sense:

1. Soros is a macro investor, this is THE macro trade of the year so far (okay, maybe Japan 1, short gold 2)

2. Soros is well-known for numerous market aphorisms and neologisms, one of my faves being “When I see a bubble, I invest.” He was heavily long gold for a time and had done well while simultaneously referring to it publicly as a speculative bubble.

3. He recently reported that he had pretty much exited the trade in gold back in February. In his Q4 filing a few weeks ago, we found out that he had sold down his GLD position by about 55% as of the end of 2012 and had just 600,000 shares remaining. That was the “smartest guy in the room” locking in a profit after a 12 year bull market.

4. Soros also hired away one of the most talented technical analysts out there, John Roque, upon the collapse of Roque’s previous employer, broker-dealer WJB Capital. No one has heard from the formerly media-available Roque since but we can only assume that – as a technician – the very obvious breakdown of gold’s long-term trend was at least discussed. And how else does one trade gold if not by using technicals (supply/demand) – what else is there? Cash flow? Book value?

5. Lastly, the last public interview given by George Soros was to the South China Morning Post on April 4th. He does not mention any trading he’s doing in gold but he does reveal his thoughts on it having been “destroyed as a safe haven”:

So hedge fund guys are like washwomen, every bit as susceptible to gossiping and rumor-mongering, every bit as inclined toward the salacious and the juicy. Especially as it pertains to the portfolios, victories and defeats of their contemporaries. This is why we have things like “Hedge Fund Hotel” stocks such as Apple last summer and AIG right now. This is why so many hedge funds – especially of the value or the activist variety – sometimes seem as though they are merely variations of each other. Oftentimes, the servicers to the hedge fund industry act as conduits for this gossip. I know an institutional sales guy who sometimes feels as though a majority of his conversations with hedge fund clients are about which analyst is moving to which firm and what the other guys he deals with are excited about or fearful of in a given niche. Even within the fund administration layer there is a grapevine of sorts. For example, you are probably unaware of this fact – 75% of all Wall Street professionals involved with prime brokerage were former college lacrosse players. It’s true, based on my estimates. Three out of four guys who work prime brokerage for JPMorgan, Goldman etc were Brothers of the Stick. They all get each other jobs upon graduation, year after year, and before you know it, here we are! The entire trade execution and settlement complex would collapse in on itself if not for the predominantly east coast and mid-Atlantic fraternity of Lacrosse Bros who keep the machinery in motion. Anyway, my point is, everybody talks. And over the last week or so, the one rumor I keep hearing from different hedge fund people is that George Soros is currently massively short gold and that he’s making an absolute killing. Once again, I have no way of knowing if this is true or false. But enough people are saying it that I thought it worthwhile to at least mention. And to me, it would make perfect sense: 1. Soros is a macro investor, this is THE macro trade of the year so far (okay, maybe Japan 1, short gold 2) 2. Soros is well-known for numerous market aphorisms and neologisms, one of my faves being “When I see a bubble, I invest.” He was heavily long gold for a time and had done well while simultaneously referring to it publicly as a speculative bubble. 3. He recently reported that he had pretty much exited the trade in gold back in February. In his Q4 filing a few weeks ago, we found out that he had sold down his GLD position by about 55% as of the end of 2012 and had just 600,000 shares remaining. That was the “smartest guy in the room” locking in a profit after a 12 year bull market. 4. Soros also hired away one of the most talented technical analysts out there, John Roque, upon the collapse of Roque’s previous employer, broker-dealer WJB Capital. No one has heard from the formerly media-available Roque since but we can only assume that – as a technician – the very obvious breakdown of gold’s long-term trend was at least discussed. And how else does one trade gold if not by using technicals (supply/demand) – what else is there? Cash flow? Book value? 5. Lastly, the last public interview given by George Soros was to the South China Morning Post on April 4th. He does not mention any trading he’s doing in gold but he does reveal his thoughts on it having been “destroyed as a safe haven”:

via about that “Soros is shorting gold” rumor | The Reformed Broker – Mozilla Firefox.