Monday, November 8, 2010

Regulators, Banks Grapple With Volcker Rule's Reach

The Wall Street Journal

Interpreting Paul Volcker (left): Treasury's Mary Miller, 
pictured in 2009, and James Brigagliano of the SEC.
 
 
 
When J.P. Morgan Chase & Co. lawyers came to Washington in September to vent about prohibitions in the Volcker rule, they didn't bother stopping at the White House or Congress.

The reason: The power to hammer out exact language in the rule aimed at preventing risky bets belongs to a small army of regulators, including some who were unknown on Wall Street before the financial-overhaul bill passed in July.

Dozens of career regulators at the Federal Reserve, the Securities and Exchange Commission and the Treasury Department are facing off against bankers, lawyers and other officials at financial firms that want to soften the impact of the rule named after former Fed Chairman Paul Volcker, which outlaws trades that aren't designed to meet near-term client demand or as a hedge. The battle could determine how much one of the most profitable businesses on Wall Street is wounded by the looming squeeze on making bets with a firm's own capital.

It isn't looking good for Wall Street, though some Republicans emboldened by last week's takeover of the House are pressing regulators to interpret the rule in a way that minimizes costs and market disruption

At some meetings, federal officials have rattled financial-industry lobbyists by saying they intend to hew closely to the 4,631 words about the Volcker rule contained in the new law. One lobbyist says a Treasury official working to craft the provisions told him: "We take a view that the rule is more inclusive." The lobbyist responded: "Are you trying to scare me?"

At another meeting attended by industry officials, a government official tapped his head and said he needed to get into Mr. Volcker's mind to know for sure how the rule should be implemented, according to one attendee.

As a result, many bank executives have abandoned their hope that trading on client desks will be untouched by the Volcker rule.

Of course, some say that Wall Street will get its way in the end, especially since some of the regulators looking at the rule used to work in finance or are reluctant to take away banks' ability to make money by serving clients.

Regulators say they are working hard to show their minds aren't made up yet. They were inundated with about 8,000 letters about the Volcker rule in a comment period that ended Friday, and the three federal agencies have stayed busy meeting with financial-industry executives and lawyers.

Already, TIAA-CREF, Citigroup Inc. and UBS AG have discussed Volcker-related concerns with Fed officials.

Goldman Sachs Group Inc., Credit Suisse Group AG and Morgan Stanley have argued in meetings with Treasury officials that they should have wide trading flexibility when clients are involved or when the trades are meant to manage risk, according to people familiar with the discussions.

"We've cast the net very widely," says Mary Miller, the Treasury Department's assistant secretary for financial markets. That includes visits to several banks in New York to hear suggestions about how the Volcker rule can be written without disrupting the ability of investors to buy and sell easily.

Ms. Miller is one of the newest officials who will translate the Dodd-Frank law into more than 200 rules touching nearly every corner of the American financial system. Before joining Treasury in February, she was a longtime municipal-bond fund manager and fixed-income executive at T. Rowe Price Group Inc.

The 55-year-old Treasury official was known at the Baltimore asset-management firm as an organized leader who kept her head in the financial markets by running a fund even after moving up the ladder to oversee other portfolio managers. She also is an amateur piano player with a master's degree in city and regional planning.

"I'm trying to use my market experience to listen to the market on this issue and to make sure that we understand the actions that need to be taken," Ms. Miller says.

People who attended a one-hour meeting in late October with Ms. Miller, Treasury's Assistant Secretary for Financial Institutions Michael Barr and the agency's deputy assistant secretary for capital markets, Matthew Kabaker, say the officials asked questions about how firms measure risk. The bank lobbyists came away somewhat relieved, feeling the government would be careful when crafting the rules.

J.P. Morgan's meeting at the Fed was led by Mark Van Der Weide, a senior associate director of banking supervision who joined the central bank in 1998 from law firm Cleary Gottlieb Steen & Hamilton LLP. The bank's big issue: keeping its ability to invest in private-equity and hedge funds under the Volcker rule.

The Sioux City, Iowa, native and runner has wrestled for years with financial regulations and bank-capital rules. Since working with lawmakers on early drafts of the Volcker rule, Mr. Van Der Weide has had discussions with banks worried about the rule's impact and consumer advocates jostling to reduce the likelihood that risky trades will lead to future taxpayer-funded bailouts.

Another Fed official involved in the rule-making process is Kieran Fallon, a 15-year veteran who works in the central bank's legal division. After his daily commute from McLean, Va., to Washington D.C. on his 2004 BMW motorcycle, he, too, attends many meetings with Wall Street representatives and public-interest groups on the Volcker rule. His department will be heavily involved next year in the drafting of the final rule's language, people familiar with the matter say.

Meanwhile, the SEC is wrestling with how to define key terms in the Volcker rule, ranging from when a Wall Street firm is allowed to invest in private equity to drawing the line between when a trade is a market-making move for a client or a naked bet by the firm.

Among the SEC officials with an influential voice is James Brigagliano, a deputy director in the agency's division of trading and markets.

Mr. Brigagliano was a force in the SEC's controversial regulation in recent years of traders who bet against stocks. The Volcker rule, he says, will be "coordinated rule making…among banking, commodities and securities regulators."

The SEC's investment-management division is also scrutinizing the law, as is the new risk division, which includes Richard Bookstaber, a former risk official at Morgan Stanley, Salomon Brothers and several hedge funds.

As part of the rule-making process, 25 to 30 regulators participate in a weekly conference call organized by the Treasury Department, discussing topics such as how trading volatility, volume and overall market patterns affect the Volcker rule.

Treasury officials also are interviewing market participants for a study of the Volker rules being written by the Financial Stability Oversight Council, an umbrella group that includes most major regulators. The study, due in late January, will include recommendations for rules that the SEC and the Fed will take the lead in publishing.

One person involved with the process says SEC and Fed officials are staking out their turf and might disagree about how to interpret the terms. The process has given some Wall Street officials hope that parts of the Volcker rule might be watered down.

On Friday, the Securities Industry and Financial Markets Association asked regulators for a second study of the Volcker rule after the January study is completed. Even if the rule is delayed, though, Wall Street officials don't expect it to be overturned.

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