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Economic Outlook: Business as Usual

by Anthony Hall

With regulatory reform for U.S. banks looming, why is it that some of the largest Wall Street firms are expanding their hedge fund operations?

This might be a question you find somewhere on Twitter. To backtrack a bit, one of the bluntest measures in the 3,000 pages of legislation handed to a joint House and Senate committee doing fine-tuning on the reform bill is the so-called Volcker Rule that is meant to prevent banks from engaging in proprietary trading and owning private equities and hedge funds.

The gambit is simple: A federally insured bank is not expected to take risks with their own funds when the risk also puts depositor money in jeopardy.

The rule, named after former Federal Reserve Chairman Paul Volcker, now a White House adviser, was one of the two items in the bill that came closest to limiting the size of banks, the other being a move for banks to spin off their swap desks. But JP Morgan Chase, while the joint committee worked out differences between the House and Senate versions of the bill, said it was undeterred it its pursuit of asset management firm Gavea Investment, and Citigroup is doggedly marching forward with plans to expand Citi Capital Advisors.

Citigroup spokeswoman Danielle Romero-Apsilos said, "the final outcome" of the regulatory bill was "currently unclear," but banks clearly believe they can sidestep, redefine or use last-minute persuasion to water down the Volcker Rule and are barging ahead with a business-as-usual mindset, backed by lobbyists and lawyers and a tradition of headstrong defiance.

Banking industry attorney Richard Schetman at Cadwalader, Wickersham & Taft was already carving out his legal hedge on the issue. "The actual legislation is pretty vague in a lot of important ways," he told The New York Times.

With a less partisan approach, "Wall Street has always been very skilled at getting around rules, and this law will be no exception. Once you open up the door just a crack, Wall Street shoves the door open and runs right through it," said Frank Partnoy, a professor of law at the University of San Diego.

In the boardrooms of New York, bankers are planning their approaches for how to squirm around the vagaries of the final bill and maintain their revenue streams. At the same time, lobbyists are pressing for exclusions to the bill and have likely already won a seven-year delay before some provisions are put into effect, the Times reported Monday.

Markets in Asia turned higher Monday after the Peoples Bank of China said it would allow the renminbi (or yuan) greater flexibility, after which it rose to the highest level against the dollar in almost two years.

Some say the peg to the U.S. dollar has kept the renminbi 20 percent or more under its true market value, and analysts said China would likely allow it to appreciate between 2 percent and 5 percent this year. But that strengthens China's domestic market and helps foreign businesses with a presence there, and exporters to China as well.

In market movement Monday, the Nikkei 225 index in Japan rose 2.43 percent and the Shanghai composite index added 2.9 percent. The Hang Seng index in Hong Kong rose 3.08 percent and the Sensex in India rose 1.74 percent.

In Australia, the S&P/ASX 200 rose 1.33 percent.

In midday trading in Europe, the FTSE 100 in Britain rose 1.04 percent, while the DAX 30 in Germany added 1.41 percent. The CAC 40 in France gained 1.63 percent, while the pan-European DJ Stoxx 50 rose 1.3 percent.

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