Volcker Said to Be Disappointed With Final Version of His Rule

Paul Volcker is disappointed with the final version of the rule that bears his name.

As first envisioned, the Volcker rule would have banned banks from running private-equity and hedge funds, an attempt to curb risk-taking that fueled the financial crisis. Last-minute congressional negotiations aimed at winning Republican support led to a compromise that allows banks to invest up to 3 percent of their capital in such funds.

Volcker, the 82-year-old former Federal Reserve chairman, didn’t expect the proposal to be diluted so much, said a person with knowledge of his views. He’s content with language that bans banks from trading with their own capital, the person said.

“The Volcker rule started out as a hard-and-fast rule on risky trades and investments,” said Anthony Sanders, a finance professor at George Mason University School of Management in Fairfax, Virginia. “But through negotiations, it was weakened and ended up with many loopholes.”

Democratic Senators Carl Levin of Michigan and Jeff Merkley of Oregon were also dissatisfied with the result, for the same reasons as Volcker, according to two people with knowledge of negotiations, speaking anonymously because they weren’t authorized to comment to the press. The two lawmakers introduced language that decreased the ability of regulators to water down a final version of the rule and provisions to prevent banks from bailing out failed hedge funds.

Photographer: Joshua Roberts/Bloomberg

Former Federal Reserve chairman Paul Volcker. Close

Former Federal Reserve chairman Paul Volcker.

Photographer: Joshua Roberts/Bloomberg

Former Federal Reserve chairman Paul Volcker.

‘Particular Interest’

Lobbying by banks and congressmen sympathetic to Wall Street’s views, as well as some administration members in the banks’ defense, trampled the views of Volcker and others who favored a stronger proposal, the people said.

President Barack Obama introduced the rule in January with Volcker, now one of his economic advisers, standing beside him. That was after the House had already passed its version of the financial reform bill, and so the rule was only included at first in the Senate package.

In the final version, U.S. banks including Goldman Sachs Group Inc. and Citigroup Inc. may have as long as a dozen years to reduce stakes in hedge funds and private-equity units, lawyers say.

Volcker said in a statement released June 28 that the bill agreed upon by congressional negotiators “provides a constructive legal framework for reform of the financial system.”

Among its provisions “are strong restraints on proprietary trading by commercial banking organizations, a point that has been of particular interest to me,” Volcker said, without mentioning the hedge-fund side of the rule. He declined to comment beyond the statement.

Brown’s Request

Scott Brown, the Massachusetts senator who was among four Republicans voting in favor of the Senate bill, demanded some of the changes to the Volcker rule. Lawmakers said yesterday they plan to reconvene the House-Senate conference on the financial- overhaul bill to eliminate a $19 billion bank fee that drew objections from Brown and other Republicans.

JPMorgan Chase & Co., the second-largest U.S. bank by assets, operates the world’s biggest hedge fund, according to the 2009 rankings of AR magazine, an industry trade publication. The New York-based firm’s hedge funds had $50 billion of assets under management as of Jan. 1, the magazine reported in March. Goldman Sachs’s hedge funds, which ranked ninth on the list, had $21 billion.

To contact the reporters on this story: Yalman Onaran in New York at yonaran@bloomberg.net.

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