The unexpected expected consequences of financial reform

Cite this Article
Larry Ribstein, The unexpected expected consequences of financial reform, Truth on the Market (August 11, 2010),

The LA Times expresses surprise that Goldman Sachs will come out quite well from financial reform.

Who did they think was calling the shots in Congress? Consumers? Investors? How badly were accountants, the culprits in the last financial meltdown, hurt by Sarbanes-Oxley?

Most notably, the LA Times is shocked Goldman is not actually going to lose a lot of money from the Volcker rule barring proprietary trading by banks:

Goldman has started to move some employees engaged in proprietary trading — the often lucrative buying and selling of securities on behalf of the bank itself — to other parts of the bank, where they will make trades on behalf of clients, according to people familiar with the situation.

I’m not as surprised. I observed on the eve of Dodd-Frank that

The vaunted Volcker rule aimed at restricting banks’ “proprietary trading” defines the term to give ample leeway to banks (which, of course, heavily influenced the final law) to take significant risks as long as they do so in what they designate as customer accounts. This not only ensures the risk problem will continue, but is also likely to increase potential conflicts between banks and their customers.

Goldman is also set to capitalize on Dodd-Frank’s restrictions on derivatives trading. Guess who can set up the required clearinghouse?

I assume we’ll be getting more stories over the years about who is really helped and hurt by financial reform.

Gambling? In Casablanca?