Closing Prop-Trading, Fiduciary Neglect (JPM, GS, BAC, C, MS)

Perhaps the biggest news of the week was that JPMorgan Chase & Co. (NYSE: JPM) was closing down its proprietary trading operations.  The ramifications were taken out of context.  On the surface, the news sounds completely irresponsible to shareholders, especially if this becomes a common practice from large banks and investment banks that just want out from under the Volcker Rule.  Not being responsible does not mean there is not another method of accomplishing the same thing and this is something that Goldman Sachs Group Inc. (NYSE: GS), Bank of America Corporation (NYSE: BAC) and even Morgan Stanley (NYSE: MS) should all take notice of.

You already saw a similar move from Citigroup Inc. (NYSE: C), but Citi at least sold its Phibro unit.  This closure was the same sort over a commodities trading group.  There is no reason that JPMorgan could not have sold the unit, well at least not short of if the group was not able to be profitable.

If this ends up becoming more common and spreads into more areas that fall under prop-trading in general, there is a far simpler way.  Our understanding is that the new Fin-Reg has as many holes as a piece of Swiss cheese, and if that is accurate then these banks can come up with a myriad of exceptions to get outside of the Volcker Rule limitations.

We are not encouraging banks to stiff regulation.  Quite the contrary.  There is a simple method here to get around much of the issues legally.  First, some prop-trading operations could easily be open to new outside investor groups.  Maybe that works and maybe it doesn’t, but that comes down to percentages and interests.  The obvious way to not just close these operations down is to spin these operations out to shareholders.

We are less eager to see every bank in the world using their inside information to make money over you and your trading efforts.  These companies are still public entities and while they are under Uncle Sam’s nose permanently now there is still a fiduciary duty to create shareholder value.  If these prop-trading operations are unprofitable, close them.  If these prop-trading desks are viable, then sell them for something even if it boils down to a percentage of the profits down the road.  If they are very large and very profitable, then spin them off to shareholders as a new company.

As long as the parent bank would not be directly funding nor adding indirect financial assurances behind the groups, they would just be independent entities.  That is very common practice throughout history.

JON C. OGG