Volcker Rule Gets Watered Down

Feb 24 2010 | 2:19am ET

The so-called “Volcker rule,” which would bar banks from owning, investing in or sponsoring hedge funds, isn’t dead, but it’s not quite as ironclad as it once was.

As originally conceived by former Federal Reserve Chairman Paul Volcker and proposed by President Barack Obama last month, bank holding companies would be barred from proprietary trading, as well as from participation in the alternative investments industry. But yesterday, the Treasury Dept. said it would push only for “mandatory limits” on prop. trading, rather than an outright bar.

Similarly, the Obama administration has recast its proposal to back only “restrictions on owning or sponsoring hedge funds or private equity funds, as well as on the concentration of liabilities in the financial system.”

The slight backtracking comes in the face of opposition in Congress—including from top Democrats—to the full Volcker rule. They also make clear that the White House will not support moves to simply give the Securities and Exchange Commission and other regulators the power to limit banking activities, as the bill currently being considered by the House of Representatives.

“We believe that rather than merely authorize regulators to take action, we should impose mandatory limits on proprietary trading by banks and bank holding companies,” the Treasury said.

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