After nearly 20 hours over two final days filled with backroom dealing, House and Senate
negotiators struck a grand compromise to merge the two chambers'
competing bills to reform the nation's financial system in a party-line
vote. But the long hours of closed-door meetings also appear to have
fulfilled Wall Street's greatest wish:
Many of the measures that offered the greatest chances to fundamentally
reshape how the Street conducts business have been struck out,
weakened, or rendered irrelevant.
Democrats unanimously supported passage; Republicans unanimously
voted against it, warning that the bill doesn't accomplish its central
objective: ending the perception that some financial firms are too big
The two most high-profile provisions were the last items to be
considered. Neither emerged intact. One would have forced banks to stop
trading financial instruments with their own capital and give up their
stakes in hedge funds and private equity funds, named after their
original proponent, former Federal Reserve Chairman Paul Volcker. The
other would have compelled banks to raise tens of billions of dollars
because they'd have to spin off their derivatives-dealing operations
into separately-capitalized affiliates within the bank holding company,
pushed by Senate Agriculture Committee Chairman Blanche Lincoln. As
currently practiced both activities are highly lucrative, annually
generating billions for the nation's megabanks.
The proposals were launched after perceived political
vulnerabilities -- the Obama administration announced the "Volcker
Rules" after Massachusetts Republican Scott Brown won Ted Kennedy's old
Senate seat, while Lincoln announced her proposal under threat by a
liberal challenger in Arkansas for her Senate seat. Both came to become
litmus tests used to gauge whether policymakers were for Main Street or
for Wall Street.
Ultimately, despite widespread approval among those pushing for
fundamental reform in the wake of the worst financial crisis since the
Great Depression, yet perhaps aided by near-unanimous revulsion among
those on Wall Street, both were watered down in front of C-SPAN cameras
beginning around 11 p.m. ET. Democratic lawmakers had been rushing to
complete the bill by Friday morning under a self-imposed deadline. The
final vote was recorded at 5:40 a.m. The conference began their final
day just before 10 a.m. on Thursday.
The so-called Volcker Rules originally banned banks from using their
own taxpayer-backed cash to speculate in the financial markets. The
federal government stands behind bank deposits, and banks have access
to cheap funds from the Federal Reserve. Volcker argued that banks
shouldn't use that subsidy to speculate.
After days of leaks to the news media that the Senate was looking to
ease the restrictions, on Thursday afternoon Senate conferees confirmed
the rumors: banks could invest up to three percent of their tangible
common equity in hedge funds and private equity firms. Tangible common
equity -- considered to be the strongest form of bank capital -- is
comprised of shareholder equity.
A few hours later, the Senate amended its proposal, changing the
metric from tangible common equity to Tier One capital. Banks have more
Tier One capital than they have tangible common equity, so changing the
requirement to the weaker form of capital allows banks to invest more
of their cash in hedge funds and private equity funds. The concession
was confirmed by Steven Adamske, spokesman for House Financial Services
Committee Chairman Barney Frank.
Using JPMorgan Chase, the nation's second-largest bank by assets
with more than $2.1 trillion, as an example, the bank would be able to
invest an additional 40 percent of its cash, or an extra $1.1 billion
for a total of $4 billion, in the activities that Volcker wanted to
prohibit banks from engaging in, according to the firm's latest annual
filing with the Securities and Exchange Commission.
Rep. Paul Kanjorski became visibly angry. The longtime Pennsylvania
Congressman tried to reverse, at least partly, the Senate's watering
down of its own provision, calling it a "significant change."
"Some of our friends that are in the Senate ... are annoyed with that enlargement, as I am," Kanjorski said.
Noting of the Senate's new proposal that the House conferees "only
had their offer for 20 minutes," Kanjorski added that his
counter-proposal was a midway point between tangible common equity and
Tier One capital.
Also, he noted, his compromise was "for purposes of getting along, but not to be taken advantage of, quite frankly."
His measure failed.
Senate negotiators also announced they were carving out a class of
financial institutions from the restrictions. The most immediate
beneficiaries are State Street Corp., the nation's 19th-largest bank
with $153 billion in assets, and BNY Mellon, the nation's 13th-largest
bank with $221 billion in assets. The exemptions were granted to secure
the support of Brown, the Senator from Massachusetts.
That loophole survived.
As for the measure's proposed ban on banks trading with their own
money, also known as proprietary trading, the agreed-upon provision
calls for federal financial regulators to study the measure, then issue
rules implementing it based on the results of that study. It could be
anything from an outright ban to a barely-there limit.
Lincoln's provision, under fierce assault by the Treasury Department, the Obama administration, and a group of Wall Street-friendly Democrats called the New Democrat Coalition, also was softened.
Lincoln's proposal would have compelled the nation's megabanks to
move their swaps-dealing units, which deal and trade in a type of
financial derivative product, into a separately-capitalized institution
within the larger bank holding company. The affected firms collectively
would have to raise tens of billions of dollars to protect their swaps
desks in case their bets went bad. Or, they could have disband the
Along with a few foreign banks, the nation's largest domestic banks
essentially control the swaps market in the U.S. By forcing them to
divest their units into separate affiliates, which in turn would compel
them to raise money to capitalize these affiliates, Lincoln's measure
could have forced them to scale down their operations. At the least,
supporters say, it would have compelled them to have enough cash on
hand in case their bets begin to sour, saving taxpayers from having to
step in to prop up the banks like they did in 2008 -- taxpayer support
that continues today.
Though Lincoln's measure had the support of three regional Federal Reserve Bank presidents -- James Bullard of St. Louis, Richard Fisher of Dallas, and Thomas Hoenig
of Kansas City -- representing the Fed and bankers in the broad middle
of the country from Kentucky to Colorado, they ultimately were
outmatched. The Fed's Board of Governors, led by the nation's central
banker, Ben Bernanke; Federal Deposit Insurance Corporation Chairman
Sheila Bair; Treasury Secretary Timothy Geithner; and the nation's
largest banks were united in their opposition.
Two minutes before midnight, Collin Peterson, a Minnesota Democrat,
announced that a deal over Lincoln's divisive measure had been reached.
"There's been some work done by the administration and some of the
senators on a potential compromise, I guess you could call it," said
Peterson, chairman of the House Agriculture Committee, in a reference
to the Obama administration.
The negotiations were not public.
Rather than banks being forced to spin off their swaps desks, they'd
be allowed to keep those units dealing with "the biggest part of all
these derivatives," Peterson said. The rest would be pushed out to an
Under the agreement, reached late Thursday, banks would continue to
be allowed to deal interest rate and foreign exchange swaps, "credit
derivatives referencing investment-grade entities that are cleared,"
derivatives referencing gold and silver, and the firms would be allowed
to hedge "for the banks' own risk."
Banks would be forced to push out to their affiliates derivatives
referencing "cleared and uncleared commodities, energies and metals
(with the exception of gold and silver), agriculture, credit
derivatives referencing non-investment grade entities and all equities,
and any uncleared credit default swaps," Peterson said.
"Frankly, the biggest part of all these derivatives, by far, are the
ones that I named that are going to be able to stay in the bank,"
Peterson added. "Interest rate and foreign exchange are by far the
greatest part of the amount of business that's involved here."
Lincoln, while praising the overall bill, acknowledged that there was only so much she could do.
"Our financial system is complicated and integrated and our time so
limited that we couldn't afford to dig in our heels, but must do
something," she said.