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TOUGH DAY ON THE STREET – Wall Street executives and lobbyists threw up
their hands in exasperation early this morning after appearing to get mostly
routed on the two issues they fought hardest in financial reform: a strict
“Volcker rule” limiting proprietary trading and the amendment from Sen.
Blanche Lincoln (D-Ark.) forcing the spin-off of lucrative derivatives
trading into separately capitalized subsidiaries. Instead of the last minute
save on these issues they hoped would come from the Treasury Department,
lobbyists suggested administration officials pushed in the other direction,
for very tough language in both areas.

The moderate Democrats and members of the New York delegation the banks were
counting on as bulwarks also did not seem able to beat back the tide for the
stronger language. The banks did win the ability to invest 3 percent of
their equity in hedge funds and private equity funds but that was seen as
somewhat small comfort given the larger impact of the final product. The 3
percent provision was necessary to win support from Sen. Scott Brown
(R-Mass.), whose state is home to big asset management companies that want
to be able to invest small amounts in alternative asset classes. The
provision would presumably allow banks to keep managing hedge funds and
private equity funds, though with little of their own money invested.

One big fear among banks executives was a late change to the “Volcker rule”
they said could significantly impair their ability to make markets in a
variety of securities to facilitate client transactions. The executives
pointed to language saying such activity could only be related to
"reasonably expected near term demands of clients, customers, or
counterparties." The executives believe this could curtail the ability of
banks to build large, longer-term inventories of stocks, bonds and other
securities that clients might eventually want to buy and sell to hedge their
own risks. "If you can't facilitate for clients, we can't properly hedge
risk and build inventory for clients," one bank official said. "It will
greatly inhibit marketing making by filtering our risk-taking business model
to an interpretation of intent."
--
Eric D. Schwerin
Rosemont Seneca Partners
(202) 333-1880
eschwerin@rosemontseneca.co