Watered-Down Volcker Rule Survives Reform Negotiations

Jun 25 2010 | 12:10pm ET

The U.S. financial regulation reform bill—Volcker rule and all—came a step closer to reality last night after a marathon series of negotiations.

The final stumbling block came after Sen. Blanche Lincoln (D-Ark.) accepted a compromise on a provision that would force banks to spin-off their swaps trading into derivatives. The conference bill—which seeks to bridge the differences between the versions passed by the House of Representatives and Senate—is likely to go to a vote in both houses next week.

House and Senate negotiators have also finalized a deal on the so-called Volcker rule, which was originally designed to bar bank holding companies from owning, sponsoring or investing in hedge funds and private equity funds. But the compromise—reached after 15 hours of negotiation—will allow all three of those things, albeit with restrictions.

Banks would still be barred from proprietary trading—the other tenet of the Volcker rule—with some exceptions. But they’ll be allowed to hold on to their alternative investment businesses, and will even be permitted to invest in them—but only 3% of their tier one capital, in a deal reportedly brokered by Treasury Sec. Timothy Geithner.

Senate negotiators also added a new conflicts of interest provision for asset-backed securities, a move seen as targeting Goldman Sachs, which has been accused by the Securities and Exchange Commission of defrauding investors in a collateralized debt obligation.

News that they’ll be able to keep their hedge funds and private equity funds was welcomed by the banking industry. News that lawmakers plan to make them pay the costs of the new regulations was not.

Banks and hedge funds will be forced to cough up a total of $19 billion under a proposal from Rep. Barney Frank (D-Mass.), the head of the House Financial Services Committee.

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