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Originally published Saturday, November 27, 2010 at 10:00 PM

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Wall Street quietly seeks to undo new financial rules

McClatchy Newspapers

WASHINGTON — The heavy hitters of finance lost big battles earlier this year during the overhaul of financial regulation, but they're working hard to win the war. They're quietly trying to soften, if not kill, some of the more controversial provisions.

Lobbyists for Big Finance are working hardest to neutralize the so-called Volcker Rule, which would force big banks to spin off their lucrative proprietary trading operations, in which they invest their own capital in speculative deals.

The measure — named after its proponent, former Federal Reserve Chairman Paul Volcker — seeks to prevent big banks from betting against trades they made on behalf of their customers, a popular practice until the financial crisis exploded in 2008.

For example, big investment banks such as Goldman Sachs sold customers overvalued mortgage bonds even as they bet secretly that those bonds would default.

Financial lobbyists also are working to soften requirements that Wall Street firms put more "skin in the game" by retaining more mortgage bonds on their books to guard against shoddy lending. They're also trying to undercut the new Consumer Financial Protection Bureau.

Through Republican lawmakers who will soon hold leadership positions in the U.S. House of Representatives, big banks are backing proposals that could lead to its being defunded or subject to conditions that weaken it.

The financial sector is also pushing to have the bureau headed by a board rather than a strong single leader.

"Taken all together, these are all proposals that were considered (by Congress) and rejected ... these don't look like proposals that were designed to help the agency do better, but rather proposals designed to gut it," said Travis Plunkett, the director of legislative affairs for the Consumer Federation of America. "This agency hasn't opened its doors yet, and already the House Republican leadership is carrying a lot of proposals that Wall Street and big financial interests have offered to eviscerate the consumer agency."

Big global banks already succeeded in softening new global rules that would have required banks to set aside considerably more funds in reserve to guard against future losses — generally called capital requirements or loan-loss reserves.

This happened at international banking negotiations held earlier this year in Basel, Switzerland. There, powerful banks weakened a proposal for a new international standard governing how much banks must keep in reserve.

These big banks also pressured global regulators to back off a mandatory requirement that would have forced banks to set aside even more capital during good times, on the premise that economic booms lead to excessive risk taking. This so-called countercyclical reserve requirement is now voluntary.

"I think the answer is they (global regulators) caved in to the pressures of the industry," said Morris Goldstein, a former top economist at the International Monetary Fund and now a senior researcher at the Peterson Institute for International Economics. "I'd like to say that things are more positive, but I have to say a lot of the momentum is fading. ... I think on the whole, we're losing steam."

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Implementing the Volcker Rule falls to the newly created Financial Stability Oversight Council, whose members include regulators over banks, stock and commodities markets. Big Finance argues that the new rules are job killers.

"We believe that the Volcker Rule is in fact harmful to the ability of the United States to sustain vibrant capital markets and ... to create private sector jobs," David Hirschman, the head of the U.S. Chamber of Commerce's Center for Capital Markets Competitiveness, wrote to the council. "In its current form, the Volcker Rule will likely add to regulatory uncertainty for banking entities and will hurt the global competitiveness of the financial services industry at a time when growth is most needed."

Volcker wrote a letter to the council, urging regulators to stand pat.

"Clear and concise definitions, firmly worded prohibitions, and specificity in describing the permissible activities will be of prime importance for the regulators," he wrote. "Bankers and their lawyers and lobbyists will no doubt search for and discover seeming ambiguities within the language of the law."

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