Now that we see big banks quickly developing ways to sidestep some of the financial regulation enacted by Congress this summer, the public outrage is starting to heat up. The New York Times stokes the fire today, with an article explaining that Wall Street banks are exploiting a loophole to avoid the Volcker Rule's ban on proprietary trading. Should we be angry? Perhaps, but any criticism should be directed at the rule, not the banks.
About a month ago I wrote about the strategy today's Times' article explains. So see this post for a refresher. The essential idea is that if the banks can specifically identify a trade as being for a client, then they can claim to wear the market-maker hat, instead of the prop-trading hat. The Times provides an example:
This year, for example, several large insurance companies approached Goldman Sachs, looking to bet that the markets would not stay quiet. Goldman gladly took the other side of the trades, but when the markets turned choppy in May, the firm was caught short and quickly lost $250 million.
The "other side" of the bet is what might have been considered prop trading. But in this case, Goldman was fulfilling the order of a client, so it can also be classified as a case of the bank acting as a market maker. The question, then, is whether we should be outraged if banks are still able to make bets for their own profit if it is in the context of making a market for a client.