Giving Up Something of Value

In looking at the summary of Paul Volcker's testimony in front of the Senate Banking Committee, I noted this item reported in the Wall Street Journal:

"Mr. Volcker said in response to a question from Sen. Mark Warner (D,. Va.) that Morgan Stanley and Goldman Sachs Group Inc. would have to make a decision if the proprietary trading ban was put in place. He said they would either have to shed their proprietary trading operations or shed their banking licenses."

That decision is the ultimate "no brainer." Investment banks would me quite mad to give up their proprietary trading operations! They are unconscionably profitable. I suspect that the decision to become bank holding companies was taken in the heat of the crisis because it was with minor incremental cost in relation to the value of Government guarantees when systemic collapse was an improbable, but non-zero alternative.

With the crisis morphing into a traditional post-binge malaise, the protection afforded by being a bank holding company is something that can be economically cast aside. Proprietary trading in an environment of volatile asset prices is exactly where adept traders make LOTS of money.