Citigroup To Cut Proprietary Trading Desk As Volcker Rule Looms
Financial reform might just be reforming finance.
Citigroup is shuttering its proprietary trading desk -- a unit that makes bets with the firm's own money -- before a provision banning the practice, with some exemptions, even goes into effect, Bloomberg and The New York Times report. Most of the unit's employees will also be leaving the firm. Citi executives said on a call last week that the unit is responsible in part for the $1.3 billion revenue loss in the firm's equity trading unit last year.
The decision to close the desk comes as lawmakers continue to work on and refine the Volcker rule, a hotly-debated provision of the Dodd-Frank financial reform legislation that aims to ban certain types of proprietary trading. The rule, which was initially proposed as a 10-page document by former Federal Reserve Chairman Paul Volcker, has swelled to a piece of legislation nearly 30 times that length that even Volcker has said is "more complicated" than he would like.
Yet in spite of criticism that the rule now has too many loopholes to be effective, Citi isn't the first bank to react preemptively to possible losses from the Volcker Rule. Goldman Sachs has closed two proprietary trading desks already, according to Reuters.
Nor is Citi's move the first indication that banks are acting on concerns over how they may be affected by financial reform legislation. The global financial industry laid off more than 200,000 workers last year, in part because of fears of future revenue losses.
Critics of proprietary trading, including some top lawmakers, have said that the practice should be curbed because of its often risky nature and potential conflicts of interest between banks and their customers. The bankruptcy of brokerage firm MF Global at the end of last year highlighted the risks inherent in proprietary trading. One of the triggers that pushed the firm into collapse was a $6.3 billion bet the firm's former CEO Jon Corzine made with MF Global's own money on the European debt crisis, according to Bloomberg.
Wall Street firms have spent millions lobbying to water down the rule, with some success, according to the NYT. Yet banks remain fearful of the rule's effects, even with all its complexities. Gary Cohn, Goldman Sachs president, told the Telegraph earlier this month that if the rule is implemented "liquidity in all markets will dry up."
Citi's decision to close the desk is the latest in a slew of bad news for the bank. Citi CEO Vikram Pandit said late last year that the bank will cut 4,500 workers in response to "unprecedented" market conditions, according to a separate Bloomberg report. In addition, Citi may cut some bonuses by about 70 percent.