Volcker is back.

So the day after the Mass. debacle, Obama finally gets it. There is only one really popular and populist trend, and it is to bash the banker.
It also happens that as well as being popular and populist, it is also very much the right thing to do.
One just has to hope that they do it right.
Volcker being on board is some consolation.
It also probably means, finally, the end of Geitner and co's. One wonders how long Bernanke can last: though his position is stronger, being less cosy to the banks, and intellectually sounder.
It beggars belief how long it has taken Obama to apprise the situation.
When Rahm said "a crisis is a terrible thing to waste", when Obama reminded the CEO's that he was the only thing between them and the pitchforks... one hoped that he understood that he had a golden opportunity to reform the financial system.
Oh well.
Hopefully he'll get to it now.
Hopefully this won't be just a re-introduction of Glass Steagall, but a strengthening and rationalization, a Glass Steagall squared.

Splitting financial institutions by function is necessary, but not sufficient.
Not just commercial and broker/dealer. Why not hiving off the settlement/payment/clearing functions completely, and treat them as a fully guaranteed utility? they are as important to our economy as electricity generation. Lending could be separated from the advisory function of investment banking. Et cetera: there is more than one way to skin a banker.

Of course, as well as reducing the risk of a full economy blowup caused by the banks as in 2008, this will severely reduce the profit generation ability of the financial sector in the boom times. That is a price worth paying, and additionally it also implies  that the "boom" will be less bubbly as well.

What else needs to be done?
Limits on the size of risk and balance sheets.
Prudential and countercyclical regulation (and maybe a bit of training  for the regulators, so that they have a chance of not getting outsmarted by the bankers).
Clear rules against bailouts of risk-taking institutions, clear guarantees and bailouts mechanisms for deposit-taking banks, and similar.
Making compensation a matter for the company owners, i.e. the shareholders, not just the board.
Forbidding discretionary payments such as dividends and bonuses when increasing debt or some leverage ratio. This should also catch the private equity pirates that sink companies by overleveraging them to pay themselves a dividend. Though it takes some serious work to do it well.

And above all, having some sensible, conservative marking rules for complex, illiquid assets.
Mark-to-market of those is a contradiction in terms (as there is no market), and it has become a ruse to use mark-to-model instead, which allows fake profits to be taken upfront, a' la champagne popping Enron. Then bonuses, and dividends, are paid out of these paper profits... Later on when the losses accrue, the salespeople/structurers/traders move on to another institution, and start the game again.
Without there paper upfront profits, a lot of the crazy derivative structures that fuelled the bubble would have never been traded.
Enough said.

So... will they get it right this time?

Sorry! no nice pictures! will try to find some later

The runes for 2010

This was written before Volcker-Obama rode into town. That deserves a blog of its own

So long since last post. In between, there has been some skiing, but also discussions with friends (who have provided the best of the ideas below, while the dodgy ones are all mine), as well as active trading in the last few days of the year recent weeks. Trading summary for 2009 will be written later in the usual place, as well as the more technical views on trading for the next term.
So the time to examine entrails is upon us again. In short, the executive summary: by end of the year we'll be in trouble. Longer term picture even worse.
Still, this year could be a very profitable one, as January has shown, assuming of course that the right approach is deployed.