US banks send in the lobbyists to blunt reform

Wall Street's biggest banks are engaged in the legislative equivalent of house-to-house fighting as the final provisions of the US financial reform bill are decided in Congress.

With lawmakers working to tie up the most sweeping reform of banking since the Great Depression by the end of this month, billions of dollars are at stake in almost every line of the legislation, and lobbyists for the industry are still confident of securing the defeat of some of the harshest provisions under discussion.

In particular, they are focusing on getting Congress to drop a provision that would force banks to sell off their lucrative derivatives trading businesses – but the industry is resigned to accepting a quid pro quo, namely new curbs on their ability to conduct proprietary trading.

Analysts at Citigroup yesterday estimated that up to 11 per cent of Wall Street's profits are at risk from the reforms, which are designed to make the financial system safer and avoid a repeat of the credit crisis. Worst hit would be Goldman Sachs, which could lose 23 per cent of its earnings.

The US Senate passed its version of a financial reform bill on 21 May, five months after the lower House of Representatives passed its own bill, and the pair now have to be married together before legislation is presented for the presidential signature – by a tentative deadline of 4 July.

Between now and then, senior politicians from both Houses and from both parties are going line by line through the legislation. This conference process began last Thursday and Wall Street has already succeeded in winning some minor victories, but the biggest fight – over exactly which bits of their business banks will be forced to exit – will come towards the end of the discussion.

The two key names to watch out for are Paul Volcker, the former chairman of the Federal Reserve and now a White House adviser, and Arkansas senator Blanche Lincoln, chairman of the Senate agriculture committee, which oversees the derivatives markets.

The "Volcker rule" would require banks to stop "proprietary trading" – that is, trading for their own profit instead of simply making trades for clients. It is simply unfair, Mr Volcker says, that banks operating with access to Federal Reserve assistance should be using that advantage for themselves rather than for clients.

The Volcker rule certainly means in-house hedge funds and private equity funds will have to be spun off; the question is how to distinguish proprietary and client trading. What is the difference between a bank buying an investment because traders think it will go up in value and buying it because they think there will be demand from clients?

Senator Lincoln's proposal added a whole new threat to Wall Street profits, since it demands that all trading in credit default swaps be conducted outside of banks. It was these opaque derivative contracts that led the financial panic to spread through the banking system in 2008, because banks had entered into trillions of contracts with each other but no one could trace who was exposed to what liabilities. The Obama administration preferred to force swaps trading on to public exchanges, ending the opacity, and does not support the Lincoln proposal, but it passed the Senate nonetheless.

The question now is whether it will survive the conference process, and Wall Street lobbyists are fighting to ensure it does not. Allies in the White House already appear to have had some success in watering down the plan. In a "clarification", Senator Lincoln suggested that her rules would allow banks to house swaps trading in a separate subsidiary which could only raise capital from shareholders or the financial markets. Analysts, however, believe the proposal could still be defeated in conference.

These debates are still to come. In the early stages of the conference process, lawmakers focused on easier areas. On Tuesday, for example, they voted to raise the cap on deposit insurance to $250,000 (£169,000) from $100,000, a move they hope will allow banks to attract more cheap money from savers. Yesterday, they were debating allowing shareholders to sue a company's banks and accountants when company officers commit securities fraud.

Credit rating agencies also scored an early victory, securing the removal of a provision that would have created a government panel to assign business to 10 federally approved agencies as a way of ending the conflicts of interest that many blame for the credit crisis. The big agencies are paid to give ratings by the issuers of debt or the creators of mortgage derivatives, something that lawmakers believe led them to mischaracterise many toxic mortgage derivatives as safe investments. Instead of the government panel, there will be a longer study of the issue, looking for a better solution.

Once the laws are in place, the focus will switch down to the regulators that will be charged with interpreting the laws and coming up with the detailed rules that govern things such as capital requirements and the characterisation of individual trades. Much of this will dovetail with the international rules coming out of the Bank for International Settlements.

Whatever big changes are decided, banks will be given years to implement them. The impact on earnings will therefore be delayed, while the impact on stock prices could be immediate – and perhaps surprisingly positive. "We believe a final regulatory reform law could be a positive catalyst as it should remove some of the overhang on the stocks that we have seen throughout the unpredictable regulatory reform process," Citigroup's bank analyst, Keith Horowitz, said. "It appears investors have already factored in most of the impact. Uncertainty has created very attractive buying opportunities."

Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
ebooks
ebooksA special investigation by Andy McSmith
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Software Development Manager

£40000 - £50000 per annum: Recruitment Genius: This is an exciting opportunity...

Ashdown Group: Product Manager - (Product Marketing, Financial Services)

£30000 - £35000 per annum + Benefits: Ashdown Group: Marketing Manager - Marke...

Recruitment Genius: Compliance Assistant

£13000 per annum: Recruitment Genius: This Pension Specialist was established ...

Ashdown Group: Market Research Executive

£23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...

Day In a Page

As in 1942, Germany must show restraint over Greece

As in 1942, Germany must show restraint over Greece

Mussolini tried to warn his ally of the danger of bringing the country to its knees. So should we, says Patrick Cockburn
Britain's widening poverty gap should be causing outrage at the start of the election campaign

The short stroll that should be our walk of shame

Courting the global elite has failed to benefit Britain, as the vast disparity in wealth on display in the capital shows
Homeless Veterans appeal: The rise of the working poor: when having a job cannot prevent poverty

Homeless Veterans appeal

The rise of the working poor: when having a job cannot prevent poverty
Prince Charles the saviour of the nation? A new book highlights concerns about how political he will be when he eventually becomes king

Prince Charles the saviour of the nation?

A new book highlights concerns about how political he will be when he eventually becomes king
How books can defeat Isis: Patrick Cockburn was able to update his agenda-setting 'The Rise of Islamic State' while under attack in Baghdad

How books can defeat Isis

Patrick Cockburn was able to update his agenda-setting 'The Rise of Islamic State' while under attack in Baghdad
Judith Hackitt: The myths of elf 'n' safety

Judith Hackitt: The myths of elf 'n' safety

She may be in charge of minimising our risks of injury, but the chair of the Health and Safety Executive still wants children to be able to hurt themselves
The open loathing between Barack Obama and Benjamin Netanyahu just got worse

The open loathing between Obama and Netanyahu just got worse

The Israeli PM's relationship with the Obama has always been chilly, but going over the President's head on Iran will do him no favours, says Rupert Cornwell
French chefs get 'le huff' as nation slips down global cuisine rankings

French chefs get 'le huff' as nation slips down global cuisine rankings

Fury at British best restaurants survey sees French magazine produce a rival list
Star choreographer Matthew Bourne gives young carers a chance to perform at Sadler's Wells

Young carers to make dance debut

What happened when superstar choreographer Matthew Bourne encouraged 27 teenage carers to think about themselves for once?
Design Council's 70th anniversary: Four of the most intriguing prototypes from Ones to Watch

Design Council's 70th anniversary

Four of the most intriguing prototypes from Ones to Watch
Dame Harriet Walter: The actress on learning what it is to age, plastic surgery, and her unease at being honoured by the establishment

Dame Harriet Walter interview

The actress on learning what it is to age, plastic surgery, and her unease at being honoured by the establishment
Art should not be a slave to the ideas driving it

Art should not be a slave to the ideas driving it

Critics of Tom Stoppard's new play seem to agree that cerebral can never trump character, says DJ Taylor
Bill Granger recipes: Our chef's winter salads will make you feel energised through February

Bill Granger's winter salads

Salads aren't just a bit on the side, says our chef - their crunch, colour and natural goodness are perfect for a midwinter pick-me-up
England vs Wales: Cool head George Ford ready to put out dragon fire

George Ford: Cool head ready to put out dragon fire

No 10’s calmness under pressure will be key for England in Cardiff
Michael Calvin: Time for Old Firm to put aside bigotry and forge new links

Michael Calvin's Last Word

Time for Old Firm to put aside bigotry and forge new links