Will You Still Need Me, Will You Still Feed Me?

When I turn 64, the Volcker Rule should finally be fully implemented. And while it really doesn't impact my livelihood, there are a lot of proprietary traders humming the old Beatles refrain and wondering if their current employers will still need them when I turn 64.

Passed as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Volcker Rule's goal was to restrict banks' proprietary trading activities and ownership stakes in hedge and/or private equity funds in an effort to reduce the amount of risk taken on by banks.

The rule has an implementation period that potentially could stretch to 11 years, starting with a two-year rule-writing allowance, followed by a two-year implementation period, three one-year extensions, and finally a four-year gradual extended transition for illiquid securities funds and/or products.

While the timeline for disgorging prop desks is long - and there still is a lot of ambiguity about the rule, such as the definition of proprietary trading, as well as loopholes, such as the fact that proprietary trading of government, government-backed and municipality debt is allowed - we already have seen firms shutter desks.

This confused me: If banks had so much time to shutter these profitable desks, why are the likes of Morgan Stanley, Deutsche Bank and Goldman Sachs shutting them down? Given the generous implementation period, there are still at least three years, and more likely six, until even the most liquid of these desks need to be closed. So what is going on? Have the banks suddenly seen the light? Probably not.

The Clock is Ticking

At first I thought that it was a publicity stunt. Being in the eye of the storm, banks were making a very public sacrifice in the name of the common good. But if you look at the Volcker Rule from an employee's perspective, you get a very different picture. If you are a proprietary trader and ask the question, "Will you still need me, will you still feed me?" you might not like the answer. And as a result, firms need to disgorge these businesses immediately.

Intended or not, the Volcker Rule ultimately sets the value of proprietary trading desks at zero. What happens to your thinking as a trader given the fact that your desk is slated for termination? On announcement date, I'm out looking for another gig. The more time that expires, the more talent that will drift way, leaving the desk with the people who have strong contractual ties or, most likely, who couldn't find a job elsewhere.

And I would argue that given a trader's short livelihood, better traders will flee just as quickly.

This leaves the bank with an asset, not unlike an option, whose value declines to zero over time, and unless legislators can be swayed, regulations changed or loopholes found, there is no turning back the clock on this trend.

As a business' value declines, the bank can only sell it off before staff leaves, carve it out through private equity, recategorize the business as nonproprietary (good luck) or just plain fold up shop. Given that the end value is zero, the faster the bank can take one of those directions, the better; harvesting profits until the clock runs down doesn't look promising.

While hopefully my wife still needs me and feeds me in 2022 (when I turn 64), prop traders, I'm afraid, may not be as fortunate in the banks' eyes.