Bank, Hedge Fund Levy Goes As Volcker Said To Be Unhappy With Reform

Jun 30 2010 | 2:21pm ET

Congressional Democrats went back to the drawing board to further water-down their financial regulation reform bill as the namesake of its flagship alternative investments rules expressed misgivings about the legislation.

House and Senate negotiators agreed to drop a $19 billion levy on banks and hedge funds to pay for measure. Instead, they decided to use $11 billion from a bank bailout fund and higher Federal Deposit Insurance Corp. rates.

The moves come as three of the four Republicans who supported the financial reform bill last month expressed reservations about the bank fee. Sen. Scott Brown (R-Mass.) told Sen. Christopher Dodd (D-Conn.) and Rep. Barney Frank (D-Mass.), who are shepherding the bill through the House-Senate conference, that he wouldn’t vote for a bill with the bank fee in it.

The Democrats need the Republican votes to meet a procedural hurdle, even more so following the Monday death of Sen. Robert Byrd (D-W. Va.).

One thing that did survive the House-Senate negotiations was the Volcker rule, which, as originally written, would have barred banks from proprietary trader and from the alternative investments industry.

The former bit survived. The latter, however, has had a great many loopholes punched through it, much to the dismay of the rule’s namesake, former Federal Reserve chairman Paul Volcker, an adviser to President Barack Obama.

Volcker is said to be disappointed by a compromise that will allow banks to invest 3% of their capital in hedge funds and private equity funds. The rule he envisioned would have barred them owning, investing in or sponsoring alternative investment funds.

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