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January 14, 2012

Big Banks Hate Volcker Rule Because They Need Leverage to Survive

Big banks are terrible investments unless they are allowed to juice their returns with tons of leverage, as FT’s Lex column nicely spelled out today when discussing JP Morgan’s results announced yesterday. 

The succinct conclusion isn’t debatable:  “The reality is that banks need leverage. There is not much point owning them until they can sneakily work out a way of getting some back.”

That’s why they are attacking the Volcker Rule with such vengeance. No prop trading and no leverage= lower returns = lower stock price = lower bonuses.  In that world, tough to be a big shot Wall Street banker at all.  That is the fear that really runs through Jamie Dimon’s mind.  All the baloney in the world that he spews out so regularly simply cannot hide that reality.  

That is why they are fighting to the death to gut the Volcker Rule and looking for a “sneakily work out a way” to continue their Volcker Rule prohibited leveraged prop trading under the guise of market making, portfolio hedging, client trading or whatever!  

The Volcker Rule is all about stopping the biggest banks from making reckless, highly leveraged bets where they get the upside and taxpayers get the downside.  This also reveals the other dirty secret of the biggest banks:  they wouldn’t survive (or be profitable or be a worthwhile investment) without the implicit backstop provided by US taxpayers if they failed.  Being “too big to fail” means that the government will step in with taxpayers dollars if necessary to prevent them from failing and wrecking our financial system.  

The real question isn’t whether you are for or against the Volcker Rule.  The real question is whether taxpayers’ money should be used to bailout the biggest banks when their bets go wrong?  Put another way, are you on the side of the biggest banks or on the side of taxpayers?  

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