Top executives with major banks met regularly with federal agency officials who were writing a draft rule meant to curtail risky Wall Street trading — known popularly as the Volcker rule, named for the former chairman of the Federal Reserve, Paul Volcker — federal agency meeting records show.
Treasury Secretary Timothy Geithner and CFTC Chairman Gary Gensler were among the agency leaders who met with CEOs from companies including Bank of America, Morgan Stanley and JP Morgan Chase since June 2010. Big banks are strongly critical of a provision in the Dodd-Frank financial law that calls for restricting banks from trading for their own accounts — a practice known as propreitary trading — limiting speculative investments, and capping banks’ investment in hedge funds and derivatives.
In the years leading to the crash, banks made huge profits on proprietary trading. But, according to experts, such risky trading was one of the reasons for the financial crisis.
However, the meetings between bank executives and top officials may have succeeded in watering down the provisions. The draft of the Volcker rule released by the four agencies last week runs close to 300 pages and includes the word "exemption" more than 400 times.
A call for comments on the proposed rule includes more than 200 topics for discussion that are now open to public comment until January 2012 and will go into action in the summer of 2012. The proposal opens up a discussion on what specific activities should be prohibited and lays out a complex compliance and oversight regimen. The rule is likely to see scores of comments from both banks and consumer groups.
Representatives of major banks including Goldman Sachs, JP Morgan Chase and Morgan Stanley met with a Treasury staffer Mary Miller who is responsible for Treasury’s management of the public debt, records show. Miller, an industry insider, appointed by President Barack Obama after a long career as director of the fixed income division of T.Rowe Price and Co., the mutual funds and retirement investment group.
Although the meeting logs only provide a brief summary or sometimes just the topic of discussion, records show some organizations raised the issue of exemtions to the Volcker rule. For example, one exemption to the Volcker rule was brought up by representatives of the Institute of International Bankers, who met with the Federal Reserve “to express views on:…the definition of “solely outside the United States for purposes of certain exemptions under Section 619 of the DFA (Volcker Rule)…”
The visualization below shows the number of times the term "exemption" was used in the proposed rule.
Several foreign banks have also expressed concern over the rule change. At issue for them is drawing the line between trading with their own capital versus with client accounts. While foreign banks will have to toe the line with the U.S. regulations, they will have to do so only in this country. Since this rule change could alter the operations of international banks, organizations such IIB, Barclays and UBS AG have met with regulators too on the rule, records show.
Banks argue that it is difficult to isolate transactions for their clients’ accounts from their own. In an interview with Forbes magazine, Citibank CEO Vikram Pandit, said “How and where you draw the line is very significant.” Banks claim that these rules could kill their competitiveness, according to their public comments. Representatives of Citigroup met with the staff of the Federal Reserve Board “to discuss the proprietary trading provisions of section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Volcker Rule).”
Some analysts have said that the proposed rule could also affect trading on Wall Street, resulting in as much as 25 percent decrease in revenues.
Financial institutions have also been lobbying heavily on the issue, records show. Unfortunately, these lobbying reports don’t list actual contacts. However, the meeting logs released by the regulatory agencies show that top officials, including Treasury secretary Timothy Giethner met with JP Morgan’s Chairman and CEO Jamie Dimon and Peter Scher, vice president of global government relations and a registered lobbyist.
Just as banks have been forthcoming and discussing the long-winded rule making process which is an overhaul of the financial industry, there are several other trade and consumer focused groups that have held meetings with the regulatory agencies. While the representatives of the Retail Industry Leaders Association have discussed exemptions to the controversial interchange transaction fee, the Americans for Financial Security, a labor and consumer coalition, met with several regulators on financial concepts such as defining swap dealers.