Perception and Reality

The Volker rule is in the news and simply stated it means that banks cannot engage in transactions that do not benefit their shareholders. It is sweeping language that would make banks restrain themselves from the extreme risk that precipitated the 2008 stock market and banking meltdown. Banks would simply be limited to matching buyers and sellers; they would not be allowed to purchase an investment as a speculation. This prevents banks from engaging in proprietary trading for their own benefit and likewise makes them behave in less risky ways.

First of all, banks have made obscene amounts of money through proprietary trading. They have also lost obscene amounts of money, which precipitated the bail out by the U.S. Government when things went terribly wrong in 2008.

The story is still unfolding regarding the Volker rule and Wall Street is not going to sit back and watch this type of regulation take place without a fight. This includes lawyers and legislators finding ways to take the teeth out of the rule and vehemently stating many reasons, some fact and some fiction, why the banks simply cannot be regulated to moderate risk and behave more like – well, the way banks used to behave.

Banks also typically figure out ways to game the system through arbitrage, derivatives that sell risk to others as a mortgage backed security and through buying risk protection insurance policies, which left AIG in a world of hurt back in 2008. The repeal of the Glass-Steagall Act, which prevented banks from engaging in brokerage, opened the door to banks acting less like banks and more like risk arbitrage machines.

The problem is that public perception did not change. Banks were perceived as safe investments and that did not change with the repeal of Glass-Steagall. Investors looked at banks as blue chip investments, which was the perception, when in fact the reality was that banks were engaged in increasingly high risk bets to boost profits.

The example of banks after the repeal of Glass-Steagall is valuable as a lessons learned exercise. The lesson is that when you invest your hard earned money, careful due diligence is essential. Take the time to understand what you are investing in and why it fits your needs as an investment.

There are many reasons why people are turning to gold as an investment. Gold is considered a safe haven investment during turbulent economic times and acts as an insurance policy against financial disaster. Gold also acts as a commodity, and China and India are both avid purchasers of gold, which drives up demand for a relatively fixed supply of gold.  Gold behaves like a stock and is subject to speculation and those who have bet that gold would go up are much richer from their gold investment.  In addition, gold is a currency when minted by governments as gold bullion. As with any investments perform your due diligence, understand what you are buying and never pay more than 5% to 20% over the spot price of gold for gold bullion.

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