The War on Prop(erty) Trading?
Posted by Mark on 25th Jan 2010
We live in strange days.
The most left wing American president in my lifetime lurches so for to the left that he declares open warfare on the banks; the reaction from our labour government is appeasement, George Osborne agrees to join in the crusade unconditionally.
You would have thought that British politicians would have learnt recent lessons about declaring unswerving support for our American friends when they get all jingoistic, but plus ca change, as the cheese eating surrender monkeys would say.....
No one knows the details that these hostilities will take; but it won't be the shock and awe of our bonus tax, rather, it seems, more the returning of the lucrative pastures of "prop trading" to hedge funds and private equity that had been annexed with the overthrow of Glass Steagall Act in 1999.
But there is always the danger of the law of unintended consequences, or to overdo the military analogy, collateral damage. Although, what is "prop" trading? Put simply it is using the bank's cash to bet alongside, or even against, the activities of it's customers. But it's never that simple, General Volcker's surgical strike at casino capitalism, could also nuke quite legitimate activities that are needed now more than ever to work through all of this bad debt.
For example, if a bank is banned from private equity participation, how does it undertake and manage a stake acquired through a debt for equity swap? Where does this leave a bank who wants to take non-performing property loans onto it's own balance sheet? If that is not "prop" trading what is?
I am sure the next government will think these issues through before sending the boys over the top, but their biggest enemy could be the two banks it already largely owns.