Thursday, November 25, 2010

Wall Street tries to undo financial regulations overhaul

WASHINGTON — The heavy hitters of finance lost big battles earlier this year during the overhaul of financial regulation, but they're working hard to win the war. They're quietly trying to soften, if not kill, some of the more controversial provisions.
Lobbyists for Big Finance are working hardest to neutralize the so-called Volcker Rule, which would force big banks to spin off their lucrative proprietary trading operations, in which they invest their own capital in speculative deals.

The measure — named after its proponent, former Federal Reserve Chairman Paul Volcker — seeks to prevent big banks from betting against trades they made on behalf of their customers, a popular practice until the financial crisis exploded in 2008. For example, big investment banks such as Goldman Sachs sold customers overvalued mortgage bonds even as they bet secretly that those bonds would default.

Financial lobbyists also are working to soften requirements that Wall Street firms put more "skin in the game" by retaining more mortgage bonds on their books to guard against shoddy lending. They're also trying to undercut the new Consumer Financial Protection Bureau.

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Through Republican lawmakers who soon will hold leadership positions in the House of Representatives, big banks are backing proposals that could lead to its being defunded or subject to conditions that weaken it.

New council has oversight

Implementing the Volcker Rule falls to the newly created Financial Stability Oversight Council, whose members include regulators over banks, stock and commodities markets. The Treasury Department is first among equals on the council, which began taking comment in October on how to implement the rule.

Big Finance argues that the new rules are job killers.

"We believe that the Volcker Rule is in fact harmful to the ability of the United States to sustain vibrant capital markets and … to create private sector jobs," David Hirschman, the head of the U.S. Chamber of Commerce's Center for Capital Markets Competitiveness, wrote to the council. "In its current form, the Volcker Rule will likely add to regulatory uncertainty for banking entities and will hurt the global competitiveness of the financial services industry at a time when growth is most needed."

Volcker wrote a letter to the council, urging regulators to stand pat.

"Clear and concise definitions, firmly worded prohibitions, and specificity in describing the permissible activities will be of prime importance for the regulators," he wrote.

"Bankers and their lawyers and lobbyists will no doubt search for and discover seeming ambiguities within the language of the law."

Joseph Stiglitz, a Nobel Prize-winning economist from Columbia University, reminded council members in a letter that proprietary trading helped cause the near meltdown of the U.S. financial system.

"Through the rise of proprietary trading at our nation's banks and the largest non-bank financial firms, firms doubled down on the accumulation of risk, much of it with little benefit to the real economy," Stiglitz wrote. He added that "the financial system in this country and around the world became disconnected from its fundamental purposes."

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