Levine on Wall Street: Confusion Everywhere
Thinking about the Volcker Rule will make your head hurt, though you will not be alone; it seems to be hurting the heads of everyone writing it. The core of the problem is that it is hard to distinguish "proprietary trading" (trading for your own account with the goal of making money) from "market making" (trading for your own account with the goal of making money and serving customers) and "hedging" (trading for your own account with the goal of avoiding losses). This problem is more or less unresolvably hard, and here is a list of failures to resolve it. Should the rule impose position limits on a bank's market-making activities, in case "the bank may have actually amassed the position because it thinks the shares will rise in the future, effectively making it a speculative proprietary position"? Should hedging have to be "reasonably correlated" with a bank's risks, or is a higher or lower standard appropriate? One approach that seems to have found favor is to punt to the banks' CEO: "The final version is expected to contain a provision that requires bank chief executives to attest that they are not doing proprietary trading," whatever that means.
European banking regulation is complicated
It's fun and appropriate to laugh at the European financial regulatory decision-making process, with a million unwieldy bodies each required to consult with 28 national regulators. Especially when the head of the European Banking Authority, one of those million bodies, is joining in the complaints, saying that "You need European decision mechanisms rather than having always a committee-type of decision in a crisis." (Though also: "“I am not seeking power here,” he said. “If someone wants to set up a different body, I am perfectly comfortable with that.") I guess Americans shouldn't be too smug, though; the Volcker Rule process is a good reminder that American financial regulation is often just as unwieldy, without the excuse of needing to respect many different national sovereignties.
Earnings are worth about the same thing everywhere
Two weeks ago in this very space I linked to a Reuters article about how it's a stock-picker's market, correlations among U.S. stocks are at their lowest levels since 2007, and the majority of active mutual fund managers are beating their benchmarks for a change. Today we have a Bloomberg News article about how the difference in stock valuations, measured by price-earnings ratio, "shrank to the smallest since at least 1990," with stocks clustered around the S&P's average 17.5 P/E. One possible interpretation is that you could outperform the market by betting that low P/E stocks would go up, and now they have, with the lowest level of valuation dispersion on record. So with valuations all the same, is it still a stock-picker's market?
Bitcoins are a fertile source of confusion
Oh no there is a Senate hearing today on bitcoins, that will be a mess. Bitcoin: Legitimate currency or evil tool of drug and gun dealers? Reports to Congress from the Department of Justice and Securities and Exchange Commission seem to be pretty benign, calling bitcoins "legitimate financial instruments," so that's nice. Obviously I do not understand bitcoins: Anything that buys 20 percent more goods and services today than it did yesterday is not really a currency, but on the other hand, anything that is transferrable only by computer seems like a bad way to buy drugs? Anyway though I can pretty much promise that Congress understands bitcoins even less than I do, so look forward to that.