Prop Trading By Banks Is Unethical, Caused Crisis and Should Be Banned, Says GMO's Grantham

A widely followed global investor has stepped up to endorse President Obama's call to bar banks from proprietary trading. "Of course prop trading was indeed the rot at the heart of our financial problems," writes Jeremy Grantham, chief investment strategist of Boston-based GMO LLC, in his latest quarterly letter to clients.

The ideas in the Obama-Volcker bank overhaul plan "are all good stuff as far as I'm concerned, and entirely justified," says the letter published on GMO's Web site and dated Jan. 21 - the same day the White House unveiled the reform package. It continues:

Everyone in Congress, and anywhere else for that matter, knows prop desk trading (banks trading their own capital like a hedge fund) is a conflict of interest....Congressmen, since when wasn't conflict of interest and poor ethical standards reason enough to change the law? ...

Watching traders take home their $28 million bonus sent a powerful message to lowly salesmen and packagers of asset-backed securities, for example, to get out there and really take some risk. This rot spread to the very top, and pretty soon chairmen of boards were exhorting CEOs to leverage up and look more like some much more profitable rival that resembled a hedge fund rather than an investment bank.

A respected value investor, Grantham has been an increasingly vocal critic of Wall Street since the financial crisis. His October 2009 letter to clients included a blast at "Over-bonused Financial Types" - which, as eFinancialCareers News noted at the time, copied the mass media's mis-labeling of Goldman Sachs' employee compensation and benefits expense line as a "bonus pool."

He's also a bit of a "perma-bear" on equities and the economy, as Bloomberg News points out. For instance, he remained bearish beyond the previous cycle bottom in 2003.

The latest missive from Grantham starts off less like an investment commentary than a discussion you might hear on the soon-to-be-defunct liberal radio station Air America. Half of page one is devoted to a ringing endorsement of the Volcker plan, and the other half to an equally strident denunciation of last week's U.S. Supreme Court decision authorizing direct corporate spending in election campaigns. (That segment ends with a suggestion to re-name the U.S. "The United Corporations of America.")