Write This Way: Wall Street Seeks Back Door From Volcker Rule

Last Updated Nov 19, 2010 12:31 PM EST

Banks don't simply want to weaken the Volcker rule -- they want to blow a gaping hole in it. The American Bankers Association is pressing financial watchdogs to ensure that any regulations written to enforce the new law can summarily be tossed aside.

The following is from a recent letter Carolyn Walsh, deputy general counsel for the trade group's securities unit, submitted to regulators in charge of implementing the Volcker rule (h/t American Banker):

Finally, ABASA recommends that the FSOC recommend that a process be established for the Federal Reserve to provide exemptions from all or part of the Volcker Rule, consistent with the intent of that Rule, so that there is a mechanism to address readily any unintended application of the Rule, in order to facilitate the orderly functioning of the markets affected by the Rule.
While they're at it, why not just chuck the thing into the East River? That sweeping exemption is on top of the wide range of carve-outs bankers are already seeking on proprietary trading, investing in private equity and hedge funds, principal investing, market-making and a host of other financial activities the Volcker rule could touch.

Writing financial regulations is like catching a falling knife. Banks hoping to dilute the Volcker rule generally want regulators to set broad parameters, so loopholes can be found. Those favoring stricter restrictions are pushing for more specific prohibitions. Yet rules can't be so narrow that they allow clever bankers to skirt their intent by, say, simply changing a trading unit's name.

The contest is also uneven. Wall Street firms are training enormous firepower on the Volcker rule and other elements of financial reform passed this summer under the Dodd-Frank act. Industry critics have far fewer resources in lobbying regulators and lawmakers.

For instance, JPMorgan Chase (JPM) has roughly 100 task forces studying the implications of new regs affecting the use of derivatives, which played a key role in causing the financial crisis. By contrast, the Commodity Futures Trading Commission, the government agency largely responsible for overseeing derivatives, has set up some 30 task forces -- to implement all of Dodd-Frank.

That doesn't mean it's a foregone conclusion that regulators will write weak rules. But it definitely skews the odds.

Image from Wikimedia Commons, CC 2.0
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