Financial Regulatory Forum

Obama bid to rein in banks meets Senate resistance

By Reuters Staff
February 5, 2010

By Kevin Drawbaugh

WASHINGTON, Feb 4 (Reuters) – The U.S. Senate on Thursday looked increasingly likely to adopt, at best, only a watered-down version of the Obama administration’s ambitious proposal to limit risky trading by banks.

After two hearings in three days on the issue, Senate Banking Committee Chairman Christopher Dodd told reporters it will be difficult to legislate a curb on bank trading practices as specific as the White House proposed last month.

He said it would be easier to include something less ambitious in a sweeping package of financial regulation reforms, under development for more than a year now, which aides said was fast nearing completion.

Dodd’s remarks signaled trouble for the proposal unveiled in late January by President Barack Obama as he moved to confront Wall Street’s excesses more aggressively following a loss for Democrats in a special Senate election in Massachusetts.

The intense debate on what has been dubbed the “Volcker rule” — because it was inspired by Paul Volcker, the White House economics adviser and former Federal Reserve chairman — preceded a meeting on Friday and Saturday of finance ministers of the Group of Seven rich nations in Canada, where financial regulation will be a hot topic. The U.S. and EU governments are both working on reforms.

Dodd mentioned possibly writing into the Senate package a requirement that regulators examine questions related to the proposal.

He said the banking committee would also look at related provisions of a financial regulation reform bill approved in December by the U.S. House of Representatives.

“We’ll take a look at that, as well,” he said.

The Volcker rule proposal, in a jolt to financial markets, called for curbing proprietary trading by banks, getting them out of the hedge fund and private equity markets, and limiting their future growth via a new market share cap.

“We’ll see how it can be done,” Dodd told reporters after the proposal met a chilly reception from many lawmakers and the usual stone wall of opposition from Wall Street interests.

“It’s going to be hard to write something as specific maybe as Paul Volcker recommended, but it’s not as hard to write a requirement that the appropriate regulators examine this question,” Dodd said after gaveling the second hearing closed.

 

DODD BLASTS BANKS

Dodd, a Connecticut Democrat, also lashed out at large banking firms for a refusal to work with Congress on reforms that he said “borders on insulting to the American people.”

He criticized the firms for hiring “an army of lobbyists” to fight reforms just months after getting multibillion-dollar taxpayer bailouts that rescued them from the financial crisis of 2008, with many executives now getting huge bonuses.

“The American people have been through too much, unemployment is still too high, and the economy remains too vulnerable to support the status quo,” Dodd said. “That is unacceptable. We need to move forward.”

A senior executive from Goldman Sachs, Gerald Corrigan, told the committee that as much as 10 percent of the firm’s net revenue could be impacted by the Volcker rule if it were enacted.

Corrigan, a Goldman managing director and former president of the Federal Reserve Bank of New York, said he opposed the rule, but voiced support for some other reforms, including creating a “systemic regulator” to monitor the economic big picture and raising bank capital standards.

He and other bankers at the hearing said the government also needs a better way to dismantle large, troubled financial firms in an orderly fashion, with an eye to preventing a repeat of the Bush administration’s haphazard handling of the 2008 debacles at Bear Stearns, Lehman Brothers and AIG.

And John Reed, a former top executive at Citigroup Inc, backed a proposal to establish a watchdog agency on consumer finance. “There is a good reason to create a Consumer Protection Agency with a clear and separate mandate,” he said.

Obama wants the proposed Consumer Financial Protection Agency to shield Americans from abusive mortgages, credit cards and other financial products.

The House approved a reform bill in December containing the consumer agency over the objections of Republicans and bank lobbyists.

The House bill also would let regulators bar proprietary trading at financial firms that are in distress, as well as force firm restructuring, which aides said could reach to divestment of hedge fund or private equity operations.

Dodd has been trying for months to forge a bipartisan regulatory reform bill to bring to the Senate floor, with aides saying final legislation could emerge within weeks.

Crucial to the fate of the Volcker rule will be whether the administration can flesh it out fast enough to accommodate Dodd’s negotiating process. Sources familiar with the matter said detailed legislative language was still being developed, two weeks after Obama unveiled the basic proposal. (Additional reporting by Rachelle Younglai; Editing by Leslie Adler) ((kevin.drawbaugh@thomsonreuters.com, +1 202 898 8390, +1 202 488 3459 (fax)))

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