The Wall Street Journal reports that Morgan Stanley may soon complete a deal to relinquish control of in-house hedge fund firm FrontPoint Partners which currently has $7 billion in assets. This move is motivated by a number of factors including the impact of new restrictions in the financial regulatory bill signed into law by President Obama last month, Morgan Stanley CEO James Gorman’s desire to reduce proprietary investing risks, and conflicts that have emerged due to bearish views expressed by FrontPoint regarding Morgan Stanley clients.
If you are already cynical about the motives and practices of professional investors in the major Wall Street banks, chances are that you are not even half as cynical as Michael Lewis. In The Big Short, Mr. Lewis spins a tale that places very unlikely characters at the center of the subprime bubble. All of the individuals were either completely unknown or relatively small players, but they shared in common an insight into the bubble that resulted in spectacular profits. This book reads almost like a novel, at least for those who have a basic understanding of credit default swaps, collateralized debt obligations, and related terminology and concepts. Read this book review for more details.
In the CSPAN video shown below, former President Bill Clinton comments on the SEC charges against Goldman Sachs and provides a brief account of his views regarding the problems with the financial system. Mr. Clinton specifically cites John Bogle’s views regarding financial intermediation consuming a greater share of economic output. He also provides some good examples regarding the difference between hedging transactions in derivatives and speculation. Read this article for more information and to view the video.
The privileged bankers who run institutions that are considered to be “too big to fail” do not suffer the same fate as their smaller counterparts as Simon Johnson and James Kwak describe in their forthcoming book 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown. Although the book is not a comprehensive account of the financial crisis or a “behind the scenes” epic story like Andrew Ross Sorkin’s Too Big To Fail, the authors present a compelling case in favor of not allowing financial institutions to reach the point where they pose systemic risks. Read this article for more information.
The Financial Times has published a five part video interview with Paul Volcker who is the head of President Obama’s Economic Recovery Advisory Board. Mr. Volcker discusses his proposed “Volcker Rule” which would limit the proprietary trading activities of commercial banks. For institutions such as Goldman Sachs that may wish to avoid the ban on proprietary trading, Mr. Volcker suggests that they will have to do so without the benefits of a commercial banking license. Read this article for more information and a link to the FT Video.