Banks Exploit Loophole in Volcker Rule with Longer-Term Bets
byNov 11th 2010 4:19PM
U.S. investment banks continue to work around recently instituted regulations restricting them from putting their own capital into short-term investments: The institutions are sidestepping the so-called Volcker Rule by making direct purchases of securities, companies and properties, which are considered longer-term investments, the Financial Times reported.
Goldman Sachs (GS), JPMorgan Chase (JPM) and Morgan Stanley (MS) are among large financial institutions using this loophole in the Volcker Rule, which was designed to reduce the chances of another financial meltdown by preventing banks from risking their own money in short-term trades, the newspaper said. Many banks have cut back or eliminated their so-called "proprietary trading" operations because of the new regulations.
Banks make so-called "principal investments" in longer-term assets because they continue to bring returns and is "a good business," the Financial Times said, citing a senior Wall Street banker it didn't identify.
While such investments have helped banks boost profits in recent years, they also helped lead to the financial crash, according to the newspaper. Lehman Brothers' 2008 bankruptcy was largely a result of its investment in the $23.6 billion leveraged takeover of property owner Archstone, the Financial Times notes.
Bank representatives declined to comment on the investments, according to the Financial Times.