January 21, 2010: A New Era Indeed
January 21st, 2010
It has been widely reported today that President Obama has proposed more and very restrictive rules aimed at Wall Street. The specific target today, according to the Wall Street Journal, is proprietary trading by banks.
Taking a walk down memory lane, on September 21, 2008, Goldman Sachs and Morgan Stanley, then the last two independent US major investment banks, were granted designations as “bank holding companies”. In a New York Times article that day, that move was described as, “…a blunt acknowledgment that their model of finance and investing had become too risky that they needed the cushion of bank deposits that had kept big commercial banks like BAC and JPM relatively safe amid the (then) recent turmoil.”
What classification as bank holding companies was supposed to do according to the Times article was, “…significantly tighten regulations and provide much closer supervision by bank examiners from several government agencies rather than only the Securities and Exchange Commission. Now, the firms will look more like commercial banks, with more disclosure, higher capital reserves and less risk-taking.”
MS set its cycle low on October 10, 2008 at 6.71 and GS set its cycle low on November 21, 2008 at 47.41. Respective rallies from those lows to their 2009 highs were 433% (October 26) and 308% (October 14).
If regulations that limit proprietary trading (and presumably other activities) are now actually going to be enforced on bank holding companies, a major profit stream for those banks as well as a significant source of bullish demand will likely evaporate or become greatly diminished.
**************************************************************