Here's the heartwarming story of a Goldman Sachs high-yield bond trader named Tom Malafronte, who bought bonds when customers were selling them, and sold them when customers were buying, and made $100m between January and June.
Congrats all around! In one sense, this is a story about the recovery of bond trading at the big banks this year, as Goldman, JPMorgan, Citigroup and Bank of America have all beat earnings expectations this quarter on stronger-than-expected bond trading revenues. (Though to be fair, Malafronte's success seems to have come in the previous two quarters.) Banks make money when clients want to trade, clients wanted to trade, and so Malafronte made money.
Bloomberg News reports that in another sense, this is a story about the Volcker Rule: How could a trader make $100m by buying bonds and then, later, selling them for a profit?. Wasn't the Volcker Rule supposed to prohibit proprietary bond trading by banks?
"It goes against everything we’ve been seeing the last three years," says a guy. One odd element in the Volcker Rule is that it is supposed to limit banks' bond inventories to the amount necessary to meet "reasonably expected near-term demand" from customers.
Malafronte bought billions of dollars of bonds, selling some immediately and keeping others for weeks as their prices went up. Were they all really necessary to meet customer demand?
To access the complete Bloomberg News article hit the link below:
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