Say Hello To Theo Bawki

Theo Bawki is not a friend from South Africa.  Rather, it's Sudden Debt shorthand for The End Of Banking As We Know It.  And if the Volcker Rule passes Congress without a bunch of customized  loopholes and exceptions, that's exactly what is going to happen. Thankfully.

As preamble, let me take you back 12-13 years. I was visiting the London HQ of Merrill to see a bond trader on behalf of my firm.  During our discussion, I noticed he kept referring to Merrill as a "bank" and, since I was an ex-member of The Thundering Herd myself, I was curious why.  After all, we who had graduated from its rigorous training program never thought of Mother Merrill as anything much more than a big brokerage firm, i.e. a very powerful marketing and sales organization for investment "products".  We most definitely did not think of ourselves as "bankers" - this was a title reserved for the boring folks who worked at Citi, BofA, etc.

But when I innocently asked him if he meant "brokerage firm", he got offended.  He had placed Merrill  (and himself) amongst those who raise funds and invest on behalf of  their institutions as principals, instead of being an honest Mr. In-Between. Apparently, in his mind this carried far less cachet than being a "banker".  The re-transformation of our financial system had started and the walls of  Glass-Steagall were coming down far faster than I imagined.

We all know what happened in the years that followed.  Our financial system became a mishmash of "players" who could and did switch hats at will in order to obtain maximum profit and minimum regulation.  Bank, broker, investor, speculator, private equity and hedge fund, loan originator, packager, servicer, dealer, trader .. all melded into an amorphous mass where Anything Goes.  And, of course, everything went: pop and south.

Patti Lupone In Cole Porter's Anything Goes

In olden days a glimpse of stocking
Was looked on as something shocking,
But now, God knows,
Anything Goes. 

In the aftermath, we urgently need to re-separate and re-define the roles of each member of the financial community.  It is insane to allow institutions that accept government-insured deposits and have access to the Fed to become heavily leveraged speculators, even in their so-called subsidiaries.  Ditto for pension funds: it is insane to allow them to "invest" in highly speculative hedge and private equity firms in the name of yield-enhancement or counter-cyclicality.  It is insane to allow small-time investors to participate and get fleeced in 500-1 margin FX trading or bucket-shop betting on indexes.

Deregulation as practised in the financial industry did not create a simpler, more transparent industry  that operated in the interest of society at large.  Instead, it begat a highly concentrated secretive club of mega-firms run by mega-billionnaire dealmakers who flaunted their riches and power ("I can get a billion at the snap of my fingers", "We do God's work", etc.).  And to add insult to injury, the very same club demanded and got a bailout by the taxpayers when it caught the clap.

So, Mr. and Mrs. Shadow Banker, meet Theo Bawki.  I hope you embrace him warmly and make him your close friend.  But if you don't, don't worry. He's not going away any time soon.