Analysis: Wall Street banks get a jump on impending rules

NEW YORK Wed Oct 6, 2010 8:34am EDT

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NEW YORK (Reuters) - Wall Street banks are taking incremental steps to scale back betting with their firms' money in hopes it will dissuade regulators from forcing more draconian curbs.

Banks like Goldman Sachs Group Inc and JPMorgan Chase are shutting down proprietary trading groups in moves that amount to self-regulation, a time-honored technique for companies likely to face tighter government rules.

Among banks, it is a tactic used by Goldman Sachs Group Inc. In other industries, companies like the Coca Cola Co have successfully adopted programs and changed their practices that helped them avoid government scrutiny.

"Banks are trying to move ahead of the regulations so they can shape the regulations themselves," said Paul Argenti, a professor of corporate communication at Tuck School of Business at Dartmouth.

Whether banks will succeed remains an open question. Government agencies are under tremendous pressure from Congress and the broader public to clamp down on an industry that required more than $1 trillion of government support in 2008 after years of reckless risk-taking.

But Wall Street also has a long history of outsmarting regulators, sometimes through self-regulation.

Wall Street firms are getting ready now for a provision known as the Volcker Rule, part of the U.S. financial reform bill passed in July. Banks are not allowed to use more than 3 percent of their capital for trading for their account, or for investments in hedge funds or for private equity funds.

Regulators still have to craft the specifics of the law. Writing the regulations could take more than a year, and banks will have years to comply.

But Goldman and JPMorgan and other rivals have been quick to begin self-regulating. Goldman is winding down its Principal Strategies Group, a unit of about 70 proprietary traders, while JPMorgan is reassigning its proprietary traders to its asset management unit.

A Credit Suisse commodity trader departed with a team of proprietary traders last month to set up their own hedge fund, also as a result of the impending rules. Bank of America Corp also cut up to 30 employees who traded for the bank's account.

"SMOKE AND MIRRORS"

While Wall Street publicly is dismantling its dedicated proprietary trading desks, some veterans of the Street are skeptical that the banks will really stop trading with their own money.

They say banks could continue making house bets by disguising proprietary trading as making markets for clients. House bets, when they are mixed with client trades, are more difficult for regulators to detect.

"To me, it is all smoke and mirrors," one former Goldman managing director said. "The truth is that most of the position-taking occurs at the market-making level."

But appearing diligent about reining in house bets can only help banks, public relations experts said.

Dartmouth's Argenti said banks are trying to send the message that they are self-regulating.

"If you can self-regulate, you'll end up shaping the regulation in a way that is more to your advantage," Argenti added.

It wouldn't be the first time Wall Street banks have followed that strategy.

Late last year, Goldman itself experimented with self-regulation when it was under siege for setting aside billions of dollars for compensation so soon after the financial crisis.

The company curbed its bonus pool, paid its executives all-stock bonuses, and made a $500 million charitable contribution.

Analysts believe that Goldman's self-regulation helped limit subsequent regulation on the sector.

Or, a little farther afield, take Coca-Cola. Facing pressure from governments across the world over its high water usage, the soft drink giant pledged to conserve water and take other steps to improve its ecological profile. The self-regulation helped Coca-Cola avert possible plant closures and other more stringent rules from governments concerned with conserving water, public relations consultants said.

Some believe there's a lesson there for banks who have long been noted for being especially secretive when it comes to their operations.

Eric Dezenhall, the CEO of Dezenhall Resources, a crisis management firm in Washington, said Wall Street is clearly working to show regulators that it is making changes.

"Will it be successful?" Dezenhall said. "Who knows? But hiding is no longer the answer."

(Reporting by Steve Eder, editing by Dave Zimmerman)

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