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Should FinReg Require that Banks Spin-off their Derivative & Proprietary Trading Operations?

Goldman Sachs
Goldman Sachs

Main Street and Wall Street got an inside glimpse into Goldman Sachs during yesterday's Senate hearings, with conflict of interest being cited as a primary concern for Senators. We asked our caucus members, should banks spin-off their derivative and proprietary trading operations?

Take our poll below and tell us what you think! Watch "The Kudlow Report" tonight at 7pm ET and find out what out caucus members have to say or check back here later for a summary from our caucus members.



The Kudlow Caucus Breakdown

Yes
Joe Battipaglia
Market Strategist, Stifel Nicolaus
If they are a depositary institution, they should be required to spin them off. If they are not, their shareholders and bondholders should be at risk and they can maintain their desks.

No
Jerry BowyerChief Economist, Benchmark Financial Network
The great dismantling should stop now. We're moving towards a national policy which forbids any financial transaction which is too complicated for a congressman to understand. Property rights, contract rights, limited government are the keys to financial stability.

No
Andrew B. BuschGlobal Currency and Public Policy Strategist
BMO Capital Markets
No, this would hurt banks’ ability to earn profits and supply capital. It would send it overseas and hurt U.S. companies’ ability to hedge their risks.

No
Kellyanne ConwayCEO and President
the polling company™
If customers are worried about possible conflicts of interest, they can do business with firms that do NOT have these "dual operating systems." Congress' "to do" list on FinReg more urgently must include tackling Fannie and Freddie, which are government behemoths responsible for much of this market meltdown and the SEC, who enabled Madoff and Stanford by ignoring them.

Yes
David GoodfriendLawyer
Yes, unless they are willing to live with a "trip wire" regime like the one that Sen. Warner (D-VA) proposes. Sen. Warner says that if the financial industry claims that a certain percentage of derivatives are for operating companies that need a hedge in commodities markets (say, 80% of the total), then let's put that figure into law. If the amount of operating company derivatives actually falls below that line-- or better stated, if purely speculative derivative trades go above a certain cap, then that would "trip" a divestiture or other requirement. The reality, of course, is that much of the financial industry is taking a "Hell no!" approach to the whole issue: no regulation, no divestitures. This then pushes the rest of us to say, fine, then divestiture it shall be.

No
Jim LaCampPortfolio Manager, Portfolio Focus, RBC Wealth Management
Co-Host, Opening Bell Radio Show, Biz Radio Network
The real issue isn't derivatives per se and prop trading is not causing any systemic problems. The answer is far simpler. Limit leverage. It’s always too much leverage whether it’s Long Term Capital, CDO's or governments.

Yes
Donald L. Luskin Chief Investment Officer, Trend Macrolytics LLC
Yes, in the sense that derivatives trading (other than bona fide hedging) should be moved out of the bank and into the bank holding company.

The best way to end too big to fail, short of a constitutional amendment banning it, is to separate guaranteed deposit banking into a narrow subsidiary that would be ring-fenced from other corporate activities. That way the other activities could continue, but bank deposits would be protected – and derivatives trading would not be subsidized by cheap capital in the form of deposits.

This is the solution the Fed is seeking, via back-channels. They are having a hard time getting anyone to listen .

No
Daniel J. Mitchell
Senior Fellow
Cato Institute
Proprietary trading played at most a trivial role in the financial crisis. Banks should not be forced to cease these operations. If regulators and/or lawmakers genuinely think this area is a cause for concern, a more reasonable approach would be to require that such operations be in a separately capitalized subsidiary with (if necessary) more onerous capital requirements.

No
Steve MooreSr. Economics Writer, The Wall Street Journal Editorial Board
Let the free market work. Banks make money on their derivative products so spinning them off will make banks more, not less risky.

The losses were on the mortgages, not the derivatives.

No
Peter Navarro
Business Professor
University of California, Irvine
The best and most direct solution is to have a clearinghouse for derivatives that gives full transparency. If you were to do that, you would be using a market mechanism to address the problem rather than heavy handed regulation.

No
James Pethokoukis
Money & Politics Columnist
Reuters
Spinning off derivatives operations will merely hand business to foreign banks and cost high-paying U.S. jobs. I don’t expect it to be in the final financial reform bill.

Yes
Robert Reich
Former Labor Secretary
Professor of Public Policy, UC Berkeley
There’s no other way to protect depositors’ money from risky trading. Regulations alone won’t be enough to ensure that trading losses don’t wipe out a bank’s commercial deposits.

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