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Wall Street’s big trading banks know the good old days are over

AP Photo/Mark Lennihan
The Goldman Sachs headquarters under construction in 2007. How many more of those will the banks be building?
By Matt Phillips
Published Last updated This article is more than 2 years old.

If investors were holding on to hope that big Wall Street banks might get back to the days of swashbuckling trading sometime soon, it seems to be disappearing today.

Stock prices dropped sharply for some of Wall Street’s biggest trading banks, with Goldman Sachs, Bank of America, Morgan Stanley and Citigroup posting particularly steep declines.

That cohort of banks is among those that will bear the biggest brunt of the impact of the so-called Volcker Rule. That’s the provision of the Dodd-Frank financial regulatory overhaul—section 619—that bans banks from speculating with their own capital. In theory, that would limit their trading businesses to low-margin, plain vanilla “market making,” essentially acting as middlemen ready to buy and sell financial instruments like stocks and bonds, when and if their clients want.

Or at least that’s the way that it was originally envisioned. But despite the fact that Dodd-Frank was passed back in 2010 regulators are still struggling to implement it. In fact, the rule technically went into effect on July 21, though a final rule hasn’t even been published yet. And banks will have until 2014 to fully comply.

Looking at the reaction of the stock prices today, it’s hard not to imagine that some banks have been betting that once the final rule is published it would be relatively toothless, especially under a weakened Obama administration, or even better, a Romney administration. Standard & Poor’s analysts estimate that the rule could cut bank revenue by anywhere from $2 billion to $10 billion annually.

Investors seem to be thinking that the Volcker rule could be on the tougher side today. For one thing the arrival of Elizabeth Warren in the US Senate may revive the regulatory impulse among Democrats, especially when it comes to the financial arena.

And unlike 2008, the financial industry didn’t make huge contributions to the Obama campaign this year. That helped ensure bankers would have a significant role in shaping financial policy when Obama first arrived in the White House. This time around, donations from the financial industry were heavily tilted toward Romney. With Washington, being Washington, that suggests the Obama administration will be even less likely to take suggestions from financiers on regulation this time around.

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