I’ll get to the market a little later, today’s action was interesting for sure, but I want to talk about what happened on the hill today.  Mr. Volker sat for the Senate finance committee today and took questions regarding separating commercial banking operations from proprietary trading.  He seems to believe that these two things should not take place under the same roof so to speak.  I won’t get into all of the specifics of the policy he would like to see enacted, you can read some of it in this WSJ article here.

Here is what’s interesting.  Back when the world was ending last February, the fed and treasury gave boat loads of cash to these banks with the sole aim of having them buy assets for their own accounts so that they could reflate the world.  Believe me, they didn’t give that money to the banks so that they could just give it right back by buying treasuries.  The banks took the cash and bought risk assets, for their own accounts, so that they could repair their balance sheets with the profit.  The biggest beneficiary of this plan was of course Goldman Sachs, hence the ensuing backlash against them for taking TARP and making record profits.  Well yea, if you have the play book straight from the government it doesn’t take a rocket scientist, which by the way they do employ a few of.  The other banks with internal hedge funds and trading operations all had the same play book, it was in all our interests that these banks make some money.  It doesn’t excuse their actions leading up to the melt down, but looking at the situation from a pragmatic point of view, this country is better off with the banks making loot.

So now that the government’s asset reflation plan has worked, for the time being, it’s time to close out their trade with the banks.  Frankly, I see it as being pretty fair, the banks fucked this nation, along with some politicians and other actors, then the banks helped the government out by reflating the asset bubble.  So my view is that Obama, maybe Bernanke, and obviously Volker believe that it’s time to close out that trade and reform the system.

Here’s my problem with separating regular lending operations from trading activities.  Well, the truth is I don’t really have any problem with it, I just have a problem with the government’s motivation for wanting it done, especially that of Obama.  Banks are not there to be an extension of government economic policy, they are there to make money, they are private industry.  Banks should be left alone to lend at the frequency and amount they are willing, not told that they have to lend money to small business instead of hording cash.  There is a very good reason that banks still aren’t lending, it’s because they don’t see a favorable credit environment to lend in, and I don’t blame them.   If Obama wants to go to a command economy structure, well he should just come out and say it.  It’s never worked at the scope and scale of the United States in history, command economies tend to fail miserably once they reach a certain size, with the obvious exception at this point of China, which is of course no longer communists in nature, only name, but does exhibit many command economy aspects.

If Obama wants a separation of lending from trading, then fine, let’s break up the banks, but don’t go half way and allow Bank of America to have a capital markets group.  If $BAC is going to just be a lending institution, they need to divest all other businesses.  I don’t want to see this crap getting muddled together so that the legislation is completely ineffective where loopholes are easily walked through.

So what does the world look like if there is a complete separation between lending and trading / advisory / capital markets businesses.  Well, Goldman Sachs is fine, I’m sure they would be willing to divest whatever little bit of lending they do in about 10 seconds, remember that they are just a big hedge fund at the end of the day, with an advisory arm.  Bank of America gets torn to pieces and spins off Merill Lynch, Citibank is torn to pieces, Wells Fargo is torn up, and JP Morgan is torn to pieces.

Is this going to happen, not a chance in hell.  There is no way the banking lobby is going to let these banks get picked apart piece by piece, end of story.

So is Volker’s plan a decent one in theory, sure.  Is Volker’s plan a good one in practice, no way, they will never do it correctly or thoroughly, that is if they get anything done at all, which I highly doubt.