When Congress passed a new financial regulation
bill last month, it sought to prevent federally insured banks from
making speculative bets using their own money. But that will not stop
banks from making bets that some critics deem risky, even as the rules
go into effect over the next few years.
That is because many such bets -- on the direction of the stock market or the price of coal, for example -- are done on behalf of clients. So, the banks say, they will continue to be allowable despite the new restrictions.
Indeed, several trades that were made on behalf of clients went bad for the banks even as the new rules were being debated in Washington this year. JPMorgan Chase and Goldman Sachs, for example, each lost more than $100 million on transactions handled for customers in the period from April to July.
Blowups like these, only larger, contributed to the financial crisis and forced the federal government to spend billions of dollars to bail out financial institutions. Yet analysts are quick to point out that many of those transactions were handled by the banks, ostensibly to serve clients.
"You can use client activity as a cover for basically anything you are doing," said Janet Tavakoli, who runs her own structured finance consulting firm. "It's very problematic that losses like this are showing up. It's a prime example of what the financial reform bill doesn't address."
That ambiguity could have broad consequences for the future of trading on Wall Street.
Given the size of the banks, these recent losses were relatively small.
But they highlight how banks will continue to be able to make bets where
their own money is at risk -- a practice that has yielded huge profits
on Wall Street in recent years.
Source: The New York Times
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