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Banks make 11th-hour push to outwit overhaul

Brown’s terms would benefit Boston giants

Scott Brown is backing an exemption that would allow banks to continue to invest capital in hedge funds. Scott Brown is backing an exemption that would allow banks to continue to invest capital in hedge funds.
By Eric Dash and Nelson D. Schwartz
New York Times / June 21, 2010

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WASHINGTON — As Congress rushes this week to complete the most far-reaching financial overhaul plan in decades, the banking industry is mounting an 11th-hour end run.

Industry lobbyists — and sympathetic members of Congress — are pushing for provisions to undercut a central pillar of the legislation, known as the Volcker Rule, which would forbid banks from using their own money to make risky wagers on the market and would force them to sell off hedge funds and private equity units.

To secure the support needed for their bill, Senate negotiators are leaning toward creating a series of exemptions to the Volcker Rule that would allow banks to continue to operate these businesses as investment funds that hold only client money, according to several congressional aides as well as industry officials and lawyers.

The three main changes under consideration would be a carve-out to exclude asset management and insurance companies outright, an exemption that would allow banks to continue to invest in hedge funds and private equity firms, and a long delay that would give banks up to seven years to enact the changes.

In particular, the provisions, sought by Senator Scott Brown, Republican of Massachusetts, and several other lawmakers, would benefit Boston-based money management giants like Fidelity Investments and State Street Corp. The biggest Wall Street firms would be helped as well.

Without the exemptions, all of these banks might be forced to divest the bulk of their hedge fund and private equity units. The fate of these provisions will be the subject of intense negotiations this week, but they have the support of Representative Barney Frank, Democrat of Massachusetts, and Senator Chris Dodd, Democrat of Connecticut, who are leading the effort to resolve the differences between the House and Senate versions of the bill.

Paul A. Volcker, the former chairman of the Federal Reserve and an influential adviser to President Obama, is spending these last crucial days in Washington trying to safeguard the rule he has championed. Congressional negotiators hope to settle on a final version of the legislation by Thursday, ahead of the Group of 20 summit meeting in Toronto next weekend.

Even if they do not succeed in their efforts to dilute the legislation, Wall Street firms are exploring ways around whatever restrictions become law.

UBS has prepared a 20-page “action plan’’ outlining various options, while senior managers at Goldman Sachs have had preliminary discussions on eventually dropping its status as a federally insured bank, allowing it to escape several of the most stringent provisions in the new law.

“Wall Street has always been very skilled at getting around rules, and this law will be no exception,’’ said Frank Partnoy, a professor of law at the University of San Diego and a former trader at Morgan Stanley. “Once you open up the door just a crack, Wall Street shoves the door open and runs right through it.’’

Banks will face many new constraints under the overhaul. For example, they will be required to set aside more capital against possible losses, a crucial lapse in the run up to the financial crisis.

Back in Washington, the horse trading over hedge funds and private equity will pick up this week.

To win Brown’s support and clear the way for Senate approval, Dodd, who heads the Senate Banking Committee, pledged last month to support the carve-out for asset managers, according to several officials familiar with the negotiations. But it was never included in the version approved by the Senate, making it a flashpoint between negotiators.

Brown and other lawmakers are also backing the exception that would allow banks to continue to invest a portion of their capital in hedge funds and private equity ventures. Just how much has yet to be decided.