The New 'Hot' Wall Street Trend: 'Boring' Banks

The "hot" trend on Wall Street, the Wall Street Journal reports, is to be boring.

In response to the soon-to-be-implemented international banking regulations (Basel III) and the recent reduction in stock trading volume, the WSJ reports that banks are gradually returning to their traditional business practices, which include trading, managing and advising on behalf of their clients.

The Basel requirements will force banks to hold more capital to guard against losses. With bigger piles of unused money, banks likely won't be able to generate the kinds of profits they were seeing in the years before the crash. (In theory, this also means they'll be less risky.) The WSJ says Thomson Reuters predicts Goldman Sachs and Morgan Stanley will see a 23 percent drop in profit from 2006 peaks.

The July financial reform legislation has also inspired some banks to trim or cut their proprietary trading desks, which make trades for the banks' own account. The WSJ reported last month that JPMorgan was phasing out its proprietary trading operations entirely. Soon after, Bloomberg Businessweek reported Goldman would likely follow suit. At the end of the month, Businessweek reported that Bank of America would fire almost a third of its prop traders.

In his Bloomberg column last week, Michael Lewis, author of The Big Short, wondered why banks were taking such drastic steps to cut prop trading, given that lobbyists were able to massage the reform into allowing banks to use up to 3 percent of their money for their own bets. An explanation, Lewis says, could be that banks have realized proprietary trading isn't as profitable as it once was. With increased government (and media) scrutiny, taking big risks, at least visibly, seems to have fallen out of style.

As Paul Krugman wrote last year, banking used to be "boring." But starting in the 1980s, regulations were lifted, including the 1999 repeal of the Depression-era Glass-Steagall Act. Government officials, including President Obama, have said deregulation helped cause the financial crisis.

Comments

[Chernynkaya]

12:26 PM on 10/12/2010

So, here’s what I learned from the article:

1) The Dodd-Frank financial reform legislation gives regulators the power to write rules governing executive pay. But it remains to be seen how effective -- or restrictive -- those rules will be. BECAUSE IT IS A NEW LAW AND THEY HAVEN’T STARTED REGULATING YET.

2) Banks are returning to their traditional ways of doing business, and no longer engaging in arcane financial instruments. Trading is not as as profitable.

3) "With increased government (and media) scrutiny, taking big risks, at least visibly, seems to have fallen out of style."

4) Executive compensation is still high, even though the banks' profits are down.

All of this is GOOD NEWS. Yes, GOOD, regardless of the headline--even #4. They want to overcompensate? Let them reduce their profits.

And on a side note—it is pretty cheeky to provide links to your own opinions in the article you wrote—not at all helpful.

[Ganched]

01:02 PM on 10/06/2010

For years Canadians have complained that their banks are boring - that they build their profits by nickle and diming each customer on every service imaginable. Earlier this year (January) none other than Krugman declared that Boring Banks are a good thing ... http://www.nytimes.com/2010/02/01/opinion/01krugman.html , and noted that Canadian banks are probably the most boring and thus most stable banks in the world. Having lived on both sides of the border and experienced big banks in both countries, the range and quality of services provided by the big American banks was way better than what I experience in the True North, but at what cost? I'll take stable and boring any day!

[karen1p]

10:50 AM on 10/06/2010

After r@ping and pillaging trillions from the American economy, the banking cartel is having a "Come to Jesus" party? I hardly think so. They are just plotting on where they can steal next....apparently it's not in the U.S., as they have stole all they can steal here. Wonder who will be the next Greece?

[Mik McAllister]

10:53 PM on 10/05/2010

Anybody else reminded of the spoof SNL did of PBS, with the musical number "We're not Stuffy Anymore"?

Where will all the young-gun hotshots go now?

[moose and squirrel]

10:46 PM on 10/05/2010

good. i like my banks boring.  if someone wants to charge me 25% to put something on credit, i probably dont need that thing.

[guveqzero]

08:19 PM on 10/05/2010

It's hard to believe that they think they can be boring, with more than $500 Trillion in derivative trades outstanding. There is a lot of junk in their portfolios, and more if foreclosures continue to grow. And, what if gold balloons and then busts? How are these banks protected? The US government backstop? The Federal Reserve bank owns Trillions of dollars of assets, what happens when the value of assets fall. After the next bubble and the resulting bank liquidity problem, the plan is that they will be dismantled. Boring is not how I would describe banks. I would put it more on the level of a ride on a rolly coaster. Frightening, but tied to the track.

[Freenation]

06:01 PM on 10/05/2010

Guess new word for safe/honest/risk free banking is boring..

[Sundialsvc4]

05:45 PM on 10/05/2010

The smartest thing that the finance community could do right now is to INSIST that Glass-Steagall be reinstated immediately. Otherwise... let's be frank... "fool me once, shame on you, but fool me twice..."

Finance, banking, and insurance are three inter-dependent lines of business that MUST be kept separate. When this is done, they form a three-legged stool: a self-correcting tripod. When the three legs are bound together, they wobble like a drunken sailor and promptly collapse. Human nature says, "repeal such laws, that we may Make More Money!" But human wisdom replies: "but, did they?"

Neither the American community nor the International community will twice be defrauded. If the American government will not intervene in blatant, multi-trillion dollar securities frauds ... swindling ... usury ... racketeering ... money laundering ... the list goes on and on ... then it is transparently obvious to one and all that said Government, far from being a defense against such rapaciousness, is an accomplice to it.

"Too big to fail" is ... "flat-assed broke."

"Crime really DOESN'T pay, because all the 'money' you thought you made is vapor."

And... "The world of human beings will not long consent to being robbed, and it will never forget having been lied to." There are MANY nations on this planet, and no, the USA is not "at the center of them all."

[karen1p]

10:53 AM on 10/06/2010

Yes,
SILENCE = COLLUSION

And we still have yet to hear from Treasury or the WH on the biggest news story to break since 1928. Simply and utterly shameful.

[gfs5541]

04:56 PM on 10/05/2010

Boring banks are good for the economy

[textynn]

06:47 PM on 10/05/2010

No Credit Unions are good for the economy. Too Big to Stop banks are good for the Elite control of the planet.

[moose and squirrel]

10:48 PM on 10/05/2010

you need both, plus other sources of capital.  they just need to behave properly.

[TheMightyMidget]

10:58 PM on 10/05/2010

Yup

[GregCoyote]

04:51 PM on 10/05/2010

Anyone that trusts bankers and insurance companies should look at a bridge I have available for sale in Brooklyn.

[pdxist]

05:26 PM on 10/05/2010

Sure, just let me take out a loan.

[rikster]

08:18 PM on 10/05/2010

I'll finance that loan for you.....at 3..no..4 no..7..no how about 27%...?

[moose and squirrel]

10:49 PM on 10/05/2010

I'll short your purchase.  tell me when you plan on defaulting and we can split profits!

[MrMcTwister]

04:32 PM on 10/05/2010

Wonder what’s happening with bank reform? Watch your wallets.

Having created giant loopholes in the Dodd-Frank law recently passed by Congress (keeping “customized” derivatives underground, for example), fighting off attempts to cap the size of the biggest banks, and keeping capital requirements relatively modest, Wall Street is now busily whittling back the rest through regulations.

Squadrons of lawyers and lobbyists are now pressing the Treasury, Comptroller of the Currency, SEC, and the Fed to go even easier on the Street.

Their main argument is if regulations are too tight, the big banks will be less competitive internationally. Translated: They’ll move more of their business to London and Frankfurt, where regulations will be looser.

Meanwhile, Wall Street is warning Europeans that if their financial regulations are too tight, the big banks will move more of their business to the US, where regulations will be looser.

http://robertreich.org/post/1245725732

[KIampfbeobachter]

08:11 PM on 10/05/2010

and if both jurisdictions are to tight and cumbersome there is still the best kept banking secret in the world:

the City of Gold DUBAI

[FogBelter]

04:13 PM on 10/05/2010

In the United States the spin might be a move to "boring banks" but that is a synthetic as opposed to mandated reality, perhaps meant to calm people's passions about irresponsible bankers, but the lack of regulations preventing banks from engaging in activities that invite future systemic failures are not in place. I think this is just a perception game. We have not returned to the era when Glass-Steagall prevented Commercial Banks, Investment Banks, and Insurance companies from crashing the economy. We are, in fact, back to the laissez-faire financial environment that preceded the crash of 1929 and the crash of 2008. The idea of "boring banks", at least in the United States, is just a marketing ploy at this point.

Banks policing themselves hasn't worked in the US Taxpayer's interest in the past, as we learned the hard way, and nothing guarantees the boring banks won't resume irresponsible behavior that will undermine the US economy in the future once more.

[audadvnc]

04:12 PM on 10/05/2010

Why is the Beast still standing?

[3 magi]

04:16 PM on 10/05/2010

The Golden Calf Cult.

[rikster]

08:20 PM on 10/05/2010

because they own the lawmakers...

[lightningbolt]

03:57 PM on 10/05/2010

Banks are going to have a hard time finding depositors if they continue gambling with depositor's money.

[consistent]

03:35 PM on 10/05/2010

It wont take long for them to find new and amazing ways to resume the destruction of the middle class.

[textynn]

06:49 PM on 10/05/2010

They've cleaned out the middle class using the trust that Americans had for them. No more trust is out there so they will just start again.