An FDIC For Proprietary Trading (GS)(JPM)

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The federal government forever has the habit of reinventing the wheel when a perfectly good wheel is already available. Paul Volcker and his allies on Capitol Hill would like banks that take deposits to refrain from proprietary trading because it puts the institutions which hold the deposits at risk. Perhaps just as bad, it puts taxpayers at risk in the event that banks with trading operations get into financial trouble as they did late in 2008. The bailout was expensive, particularly for the average person who religiously pays his taxes each year.

The government has a decades-old program for insuring deposits, the FDIC. Depositors’ money is insured up to $100,000. That amount will rise to $250,000 in 2013. The agency insures deposits at more than 8,000 firms.  Late last year, as the FDIC became low on funds to cover failed banks, it went to firms for which it insures deposits and collected their fees for 2010, 2011, and 2012. These sums, taken early, the agency said, would give it the buffer necessary to cover losses in the system while the credit markets recover.

The government does not need to push large banks out of the proprietary trading business. It merely needs to force them to pay high premiums to insure that, if these businesses implode,  they will have created a pool of money to cover the losses.

The fee to insure proprietary trading assets would have to be unusually high in the next few years while the fund is established. Large trading firms such as Goldman Sachs (NYSE:GS) and JPMorgan (NYSE:JPM) might be forced to put up several billion dollars over a short period. The system could also be set to cover private hedge funds which make their money in many cases by proprietary trading. That might be considered unfair because hedge funds that get into financial trouble simply go out of business. But, their payments of an insurance fee would help guarantee that a large bank failure would not swamp any of these hedge funds if they held paper due to open trades with that bank.

The Volcker plan involves taking a system of large banks which trade for their own accounts, a system which has been in place for decades, and dissolving it even though it has had benefits for shareholders in many of these banks and has created taxable earnings from them which has enriched the IRS in amounts that are almost certainly in the billions of dollars.

Why destroy a system which is occasionally very productive when that system can simply be insured?

Douglas A. McIntyre