It’s crunch time for financial reform, and Wall Street banks are lobbying hard to keep a central pillar of financial reform from becoming law, and, at the same time, are planning ways of getting around whatever financial reform restrictions do become law, according to a recent New York Times article by Eric Dash and Nelson D. Schwart titled “Banking Lobbyists Make a Run at Reform Measures.”
The central pillar that banks seek to defeat or at least undercut is called the “Volcker Rule,” which would prohibit banks’ proprietary trading and require divestiture of hedge funds and private equity units. The Volcker Rule is being spearheaded by Paul Volcker, the former chairman of the Federal Reserve, who is widely credited with ending the United States’ stagflation crisis of the 1970s, and is an influential adviser to President Obama.
Banks seek three major exemptions to the Volcker Rule: (1) make it inapplicable to asset management and insurance companies, (2) allow banks to continue to invest in hedge funds and private equity firms, and (3) delay any requirements for up to seven years.
The banks mentioned in the article that are seeking or would benefit from such exemptions include JPMorgan Chase, Goldman Sachs, Morgan Stanley, Fidelity Investments, and State Street Corporation.
JPMorgan wants to retain its Highbridge Capital Management unit; Goldman Sachs wants to hold on to several large hedge funds, including its flagship Global Alpha franchise; and Morgan Stanley wants to keep FrontPoint Partners and several other smaller hedge funds, according to the article.
Without the exemptions, these banks might have to sell or spin off their hedge fund and private equity units. “The fate of these provisions will be the subject of intense negotiations this week, but they have the support of Representative Barney Frank, Democrat of Massachusetts, and Senator Christopher Dodd, Democrat of Connecticut, who are leading the effort to resolve the differences between the House and Senate versions of the bill,” according to the article.
At the same time, the banks are exploring ways around whatever restrictions become law. Reportedly, UBS has prepared a 20-page “action plan” to end-run restrictions.; Goldman Sachs is considering no longer being a federally insured bank to avoid several potential new provisions; JPMorgan’s CEO Jamie Dimon is conducting weekly strategy sessions; and large corporate law firms and management consultants are offering road maps to get around potential new legislation.
“Wall Street has always been very skilled at getting around rules, and this law will be no exception,” Frank Partnoy, a professor of law at the University of San Diego and a former trader at Morgan Stanley, was quoted as saying. “Once you open up the door just a crack, Wall Street shoves the door open and runs right through it.”
The article noted that the major banks declined to comment; however, they must be pretty confident about rolling back reform efforts, in light of the deals they are making. Even with the legislation still in flux, the article reports that JPMorgan is proceeding with plans to buy G?vea Investments, a large Brazilian asset management company; and Citigroup is raising $3 billion from outside investors to expand its hedge fund and private equity units.
The article seems to take it as a given that banks, despite their efforts, will face some significant new constraints, such as: (1) being required to set aside more capital against possible losses; (2) additional regulatory scrutiny if they are deemed too big to fail and a potential danger to the financial system; and (3) requiring derivatives be traded via transparent clearinghouses and exchanges.
With regard to the proposed Volcker Rule’s restriction on banks’ ability to make speculative bets using their own capital, known as proprietary trading, however, some traders say that banks might still be able to make big bets by classifying them as hedging instead of speculation.
“The actual legislation is pretty vague in a lot of important ways,” Richard Schetman, a financial services lawyer at Cadwalader, Wickersham & Taft, was quoted as saying.