Obamas Volcker Rule May Not Survive Congressional Skepticism
The proposals timing is viewed by some as “transparently political and not substantive,” Senate Banking Committee Chairman Christopher Dodd said on Feb. 2. It was “airdropped” into the Senate debate on legislation to overhaul U.S. financial rules, said Senator Richard Shelby, the panels top Republican.
“Its tough to take on another issue at this point,” Dodd, a Connecticut Democrat, said at a hearing in Washington yesterday that included executives from Goldman Sachs Group Inc. and JPMorgan Chase & Co. “It was never my intention, or I believe the intention of this committee, to solve every issue surrounding the financial-services sector.”
Members of the Senate panel have been working for weeks to translate into legislation the plan Obama released in June to overhaul U.S. financial rules. The focus is on the Senate after the House passed its version of the legislation in December.
Obama named the Jan. 21 proposal after its chief proponent, ex-Federal Reserve Chairman Paul Volcker, now a White House adviser. Based on an idea circulated in a January 2009 report by the Volcker-led Group of Thirty, composed of former central bankers and finance ministers, it would force banks to stop the trading they do on their own accounts and give up their stakes in hedge funds and private-equity funds.
Citigroup Trader Quits
Some traders have already taken note. Matthew Carpenter, head of a Citigroup Inc. unit that trades U.S. stocks using the banks money, quit to join hedge fund Moore Capital Management LP, people briefed on the matter said yesterday. Leaving with him is his deputy, Matthew Newton, amid concern the government may order banks to exit such businesses, the people said.
Dodd and Shelby told reporters yesterday they hadnt ruled out incorporating the plan into the bill. Dodd, who on Feb. 2 said he “strongly” supported the proposal, said hed consider language empowering regulators to carry out the recommendations without having lawmakers write the rules, and Shelby said he wanted to see whether regulators already have the power.
The announcement came two days after a Republican victory in the Massachusetts Senate race that cost Democrats their supermajority in the Senate — timing that stoked speculation it was motivated by politics.
Volcker said Feb. 2 that the timing was “sheer coincidence.” Obama decided to back the proposal weeks before the Massachusetts election, he said. Volcker wasnt available for comment yesterday, according to his assistant, Anke Dening.
Client Business
The White House defines proprietary trades as those not done for the benefit of customers, a senior administration official said when the Volcker plan was announced. Regulators would have the power to ask banks whether certain trades are related to client business, the official said. If theyre not, the regulators could order firms to exit the positions.
Senator Michael Crapo, an Idaho Republican, pressed Deputy Treasury Secretary Neal Wolin at the Feb. 2 hearing to release details of the plan “so that we can understand specifically what we are talking about or what the proposal is with regard to proprietary trading.”
Wolin responded by telling Crapo the administration is working with regulators to prepare a draft legislative proposal that it will send to Congress “soon.”
Drawing a Line
Drawing a line between bank and customer trading wont be easy, said Hal Scott, a professor at Harvard Law School who specializes in international financial systems.
A narrow definition probably wont reduce risk, Scott said, while a broad one could “seriously impair the basic function of modern banks as market-makers” in government and non-government securities and as packagers of consumer debt into bonds.
Goldman Sachss E. Gerald Corrigan, who like Volcker is a past president of the Federal Reserve Bank of New York, said at yesterdays hearing that banks should be allowed to own and sponsor hedge funds and private equity funds because any risks can be managed. Corrigan is chairman of the firms regulated bank subsidiary.
Barry Zubrow, JPMorgans chief risk officer, told the committee the activities the administration is proposing to restrict didnt cause the financial crisis.