Weekend reading: Obama versus the banks

Most Monevator readers will be aware by now of US president Obama’s plans to clamp down on banking, which he revealed on Thursday.

I’m pleased, even though I’ve lost a bit of money (temporarily, I reckon) on my individual bank holdings (HSBC and Standard Chartered).

After blaming bankers from day one of the credit crisis, I wasn’t surprised to see them quickly return to their old game – making out-sized profits from taking little personal risk with other people’s money, and paying their traders a huge bonus to do so. Something had to be done.

Today’s blog of the week succinctly explains how the falling price of bank shares, particularly in the US, demonstrates investors are well aware that some banks proprietary trading desks are making more profit than they should.

The article comes from the always interesting Chris Dillow, the Investor’s Chronicle writer, who blogs at Stumbling and Mumbling.

Chris writes:

Firstly, prop trading profits might arise from using information the bank gleans from its ordinary dealings with customers. The most egregious example of this occurs with takeovers; there’s a long-established tendency for share prices in a target company to rise just before a takeover is formally announced.

Secondly, prop traders enjoy a low cost of capital because they are backed by a large bank, and this would disappear if they had to stand alone. A lot of marginally profitable trades – such as betting on tiny falls in yield spreads – would cease to be profitable if the cost of capital rose.

If you doubt the importance of these two factors, just ask why traders work for banks at all? Why don’t they move out of dirty, over-crowded New York or London, buy a country mansion and trade on their own account – or failing that, buy out the bank and set up on their own as many hedge fund managers did? The answer is that they need the bank’s backing, and cannot make much money from their own skills.

Absolutely. As I wrote the other day, bankers have not become 100 times more clever or skillful in the past two decades. They’ve just handled – and creamed off – more money.

For example, for the past year, many fixed income traders have ‘earned’ millions by executing a trade about as sophisticated as ‘stoozing‘ – the practice of borrowing thousands on a 0% credit card and putting it in a post office account for the interest.

If I can do that in my lunchtime, I fail to see why some chinless Charley in Canary Wharf should be paid hundreds of thousands for doing something similar with cheap money designed to clean up banking’s mess.

Some good reads from the money blogs

• Freedom of financial choice is a myth – The Psy-Fi blog
• Overconfidence and future tax rates – Mike at Morningstor Advisor
• Blue chips, dividends and healthcare for 2010 – Blogging Stocks
• Would you do prison for $20 million? – Darwins Finance
• Common sense guide to dying with dignity – Weakonomics
• Why most people fail at investing – The Dividend Guy
• Gold buyers to be investigated – Money Watch
• Make your own Starbucks coffee drink – The Digerati Life
• Do something you love – Consumerism Commentary

Financial and money articles from the newspapers

• Bogle on restoring faith in financial markets – Wall Street Journal
• Bank investors urged not to sell – FT
• Emerging markets via UK blue chips – FT
• How to avoid the 50% tax rate – FT
• We should not want an end boom and bust – The Telegraph
• Cash ISA rates to rise – The Telegraph
• ETF options for Islamic investors – Motley Fool
• Dodge the gold jewellery rip-off – The Independent

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