The White House has some quick explaining to do if it wants to convince lawmakers that a proposed limit on risk-taking by big banks needs to be included in financial reforms that are already more than a year in the making.
The 11th-hour rule, proposed late last month by President Barack Obama and inspired by White House economics adviser Paul Volcker, could be left behind as the U.S. Congress moves toward a bipartisan deal on tighter financial regulation, said some analysts and congressional aides on Wednesday.
After a less-than-illuminating Senate Banking Committee hearing on Tuesday, many predict the Volcker Rule is doomed. Although some analysts have reported that the Volcker rule could be watered down and included in a final legislative package expected to emerge from the banking committee as early as mid-February.
“If you want to get the broader bill done, you need to water down the Volcker language and that’s how we expect it to end up,” said Jaret Seiberg, an analyst with Concept Capital. President Obama stunned financial markets in January with the proposal to restrict proprietary trading by banks, get them out of the hedge fund business, and limit their future growth ::::
Few details of the proposal were forthcoming at the Tuesday hearing from two administration witnesses: Volcker, the former Federal Reserve chairman who is considered a sage of monetary policy and crusader for tighter regulation, and Treasury Deputy Secretary Neal Wolin. Banking Committee Chairman Christopher Dodd, who chaired the session, voiced frustration over the lack of specificity from Volcker and Wolin. Negotiations in the committee over regulatory reform are at an advanced stage. Obama’s latest proposals complicated those talks and made Dodd’s job of building consensus harder.
The trouble is that they are coming very late in the game and lawmakers are uneasy about whether they can be accommodated. Some think it is unlikely.
“The Volcker rule has some abstractness to it that made it difficult to see how it fits. … It may not be included in some of the regulatory proposals that will be passed,” Republican Senator Bob Corker told Reuters Insider on Wednesday.
Reuters Insider TV interview with Corker schedule.reutersinsider.com
Wolin told the Tuesday hearing that the Treasury Department will send “draft legislative proposals to the committee. … We’re currently working internally and with the regulators to craft language.”
He said the language would be delivered “in short order — I don’t want to define exactly how many days … or weeks — but it’s going to be soon. We understand that you all are busy putting legislation together.”
Richard Bove, a banking analyst at Rochdale Securities, said in a research report that the Volcker rule was “poorly thought out” and it “looks to be doomed.”
“There was no consensus to support the Volcker rule” evident at the committee hearing on Tuesday, Bove said.
Treasury Secretary Timothy Geithner said on Tuesday at a separate hearing that the rule aims “to make sure we have clear constraints on risk-taking by these large institutions so they don’t bring us to the edge of collapse again.”
He added, “We’ve got to design those regs in a way that’s sensible and careful and recognize the reality of the way institutions are run.”
Another hearing before Dodd’s panel will take place on Thursday, with executives from JPMorgan Chase and Goldman Sachs — both firms that could be directly affected by the Volcker rule – scheduled to testify.
The Senate’s consideration of the proposals comes days ahead of a meeting in Canada on Friday and Saturday of finance ministers of the Group of Seven rich nations, where financial regulation reform is expected to be a hot topic. More than a year since the 2008 financial crisis that rocked economies worldwide, the U.S. and EU governments are working on reforms to banking and market regulation that are expected to be the most sweeping since the 1930s.