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We don’t get fooled again

February 8, 2010

Adrian Blundell-Wignall, OECD Special Advisor on Financial Markets, talks about the impact of US proposals for banking reform and how they can help avoid a new financial crisis.

3 Comments leave one →
  1. March 22, 2010 04:07

    The discussion here is very logical and I do not wish to be critical because I broadly share the views expressed. However, strong forces in banking will oppose many of these proposals because they will probably consider them as a threat to their control and hip pocket.

    For example, having your own hedge fund “in-house” gives the senior bank executives a much better chance of sharing in the profits from hedge fund activity than if the hedge fund is clearly separate from the bank (e.g. the bank owns some/all of the equity).

    This is because inhouse hedge funds have a competitive advantage over “arms length” hedge funds. For example, counter parties to the fund take more comfort in knowing that the hedge fund is inside the bank and this may be reflected in pricing and deal flow and thus higher profits. Moreover, the separation of hedge fund from bank is likely to lead the directors and staff of the hedge fund wanting more autonomy and a greater share of profits.

    While it’s probably not the role of the OECD to anticipate and comment on the potential for resistance to its proposals including the importance of standing up to these strong forces, I think the arguement would be even more compelling if you had.

    Regards,

    Glenn Woolley
    Managing Director
    Intrinsic Investment Management
    Melbourne Australia

  2. adrian blundell-wignall permalink
    March 22, 2010 11:07

    I agree entirely with this comment. The cheque books are out to influence the regulatory outcome. The hip pocket issue does not just apply to hedge funds. More generally i think a subsidiary structure with legal separation and fire walls is required for many IB activities that would raise the cost of capital for risk activities–as is appropriate. “Prioritory trading” should include: hedge funds, private equity, directional prop trading, market neutral prop trading, origination (warehousing issues), market making (inventory issue), underwriting (exposure issues), OTC derivatives, market making (inventory issues). Of course i am not optimistic–the tax payer is footing a massive bill, and memory is already fading in some quarters.

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