Banks’ losses raise spectre of renewed proprietary trading
City of London trading desks at several big investment banks lost money after the collapse of AbbVie’s $54bn takeover offer for Shire, raising fresh questions about whether banks are skirting a ban on making speculative bets with their own funds.
Banks including Citigroup, Credit Suisse, Barclays and Goldman Sachs suffered losses from holding large positions in Shire stock when AbbVie withdrew its offer for the UK drug company in October, sending Shire shares tumbling in value.
While investment banks are permitted under the so-called Volcker rule to hold inventories of shares to sell on to their clients, senior bankers said it was not typical to hold such a large exposure to a single company in a takeover situation solely for market making purposes.
Citi lost in the region of $20m, and Credit Suisse about $6m, people familiar with the positions said. The other banks’ losses were unclear.
“It is difficult to justify this sort of activity as normal market making,” said one senior investment banker in London. Barclays, Credit Suisse, Citi and Goldman Sachs all declined to comment.
Betting on AbbVie’s offer for Shire being completed was one of the largest hedge fund trades of this year. Several of the biggest and most well-resourced hedge funds lost tens of millions of dollars when the deal fell apart amid pressure from the US government over AbbVie’s aim to relocate its tax domicile to the UK.
Citi, Credit Suisse, Goldman Sachs and Barclays are all large market makers in Shire shares, meaning they regularly hold inventory of the company’s shares.
Citi and Goldman Sachs’ corporate finance arms, which are separated from their trading desks by so-called Chinese Walls, were also advising Shire on the approach from AbbVie.
After investment banks relied on government support during the financial crisis, regulators introduced new rules in the US to prevent them from speculating using their own capital, a practice known as proprietary trading.
Many banks have since said they no longer engage in any form of proprietary trading, and have spun off the once-sprawling divisions that used to trade in this way.
The Volcker rule, named after former Federal Reserve chairman Paul Volcker that bans banks from proprietary trading, was one of the centrepieces of the US Dodd-Frank financial reform legislation of 2010 following the collapse of Lehman Brothers two years earlier.
“This is a dirty secret in London,” said one hedge fund manager. “Everyone knows that the trading desks at the banks take positions in these sorts of deals through their market making operations.”
Regulators have jousted with banks over where the line is drawn between legitimate market making, in which they buy and sell securities on behalf of clients, and proprietary trading. Banks argue that overly strict regulation would hinder their ability to serve their clients.
The final version of the Volcker rule, which was delayed by four years as banks lobbied over its wording, gave market makers a greater amount of flexibility on activities that involve buying and selling shares and bonds on behalf of clients.