In March, as U.S. bank regulators were framing a new rule that would affect the $630 trillion derivatives market, JPMorgan Chase & Co sent five bankers from New York and London to Washington to raise some fine points about the impact of the financial reform.
In a jargon-laden, 23-slide presentation, the JPMorgan bankers walked regulators through the complexities of how their decisions would affect the arcane market, according to documents and a person familiar with the meeting.
On July 2, the U.S. Federal Reserve released the final rule. Of three requests made by JPMorgan - which were backed widely by other banks and lobby groups - regulators rejected the first, adopted the second and split the difference on the third.
The episode highlights the less antagonistic approach Wall Street is taking as it tries to blunt the force of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the 848-page legislative response to the financial crisis. Sunday marks the three-year anniversary of its passage.
Bank executives, lawyers and lobbyists now portray themselves as concerned parties trying to help stretched technocrats, who face the task of writing hundreds of complex rules to regulate high finance.
The current strategy contrasts with the knock-down, drag-out fights that occurred during the legislative process - and even afterward, as bank lawyers battled agencies in court, and lobbyists fought to repeal Dodd-Frank in Congress.
Wall Street today tacitly acknowledges that it can tweak but not undo reforms.
One bank executive compared the current feeling to having just moved into a rundown house he didn't really want to buy, but might not think is so bad in a couple of years after renovating it.
"You can't fight with your regulator - it's different from sparring with Congress about legislation," said Eric Edwards, a partner in the Washington, DC, office of Crowell & Moring, a law firm that focuses on government affairs issues for large financial firms. "At the end of the day, banks will want to have positive ongoing relationships with their regulators, so it makes sense for banks to take a more cooperative posture during rulemaking."
If anything, even five years after the financial crisis, the political and regulatory stance in Washington is only hardening. The U.S. Federal Reserve and the Federal Deposit Insurance Corporation recently unveiled tough rules on capital and leverage ratios that caught bank executives off guard.
At a Wall Street conference earlier this week, U.S. Treasury Secretary Jack Lew blamed people in the room for trying to water down Dodd-Frank and pledged that "core elements" of the law will be in place by year-end.
Those on the outside say too much is at stake for banks to believe that a subdued approach to lobbying will work. Rules being fashioned now can make a difference of billions of dollars in profits for banks. How they are written will also determine the stability of the financial system and the ability of the world to avoid another crippling crisis in the future.
"The lobbyists might be less vocal, but they are constantly deploying their forces by visiting regulators," said Mayra Rodriguez Valladares, managing principal of MRV Associates, a firm that advises banks and regulators on implementing the new rules.
In the derivatives market, for example, reform broadly calls for banks to hold more capital against risky positions. The rules, such as the ones JPMorgan met with regulators about in March, will determine how much money banks have to set aside to protect against trading losses and how risk is calculated.
That means every little detail counts, especially for banks like JPMorgan, Citigroup Inc, Bank of America Corp and Goldman Sachs Group Inc, which together control more than 90 percent of the U.S. derivatives markets.
"The American banks are going to fight this tooth and nail because their derivative positions are huge beyond belief," said Rodriguez Valladares.
'NOT ABOUT US'
Bankers and lobbyists say that having spent the last three years and billions of dollars to restructure their businesses around financial reforms, few want to turn back the dial entirely. Some even claim to see the benefit of more transparent markets with tighter regulations.
Sometimes the approach helps to make sure regulators refrain from regulation that is impossible to implement. A recent rule crafted by the Commodity Futures Trading Commission for foreign exchange trades, for example, would have required prime brokers to give certain disclosures to their clients before a trade happened. Regulators, however, did not realize that prime brokers do not have that information because the trade is actually executed through separate electronic brokers. At the 11th hour, the CFTC revised its rule to relieve prime brokers from the obligation, but not without first causing fears throughout currency markets. The CFTC declined to comment.
"We can't - and I think we are trying not to - say, ‘Oh, this is going to hurt our firm or this is going to hurt the industry,'" David Viniar, former Goldman Sachs CFO said at an industry conference last year.
Instead, banks should address questions like, "What will be good for growth? What will be good for the free flow of capital? What will be good for the markets?" he said. "And we need to convince people that's really what we care about."
At Goldman, that message has been drilled into staff. Current CFO Harvey Schwartz - a chief architect of the bank's response to reform - has expressed sympathy for the challenge regulators face in crafting and implementing new rules.
Andrew Olmem, a partner in the Washington office of the law firm Venable LLP, said bankers may have valuable input because it is their business.
"Actual businesspeople can be better at predicting how the market will change in response to a new rule than regulators because it's their business," said Olmem, who was a lead Senate staff negotiator for Dodd-Frank and also worked at the Fed.
Despite the banking industry's best efforts, it has already lost some of its most lucrative businesses. Regulators have substantially increased capital requirements and forced major banks to significantly reduce risk.
Proprietary trading, long a way for banks to take on outsized risks to super-charge profits, is fading away. Banks are shedding riskier assets and getting out of businesses like structured products that have become too expensive because of the capital they have to hold against them.
Major U.S. banks reported big profit gains this month, leading critics to contend that new rules are not actually hurting their operations. However, the returns that shareholders care more about have come down because they had to raise more capital. Goldman Sachs, for example, reported a 10.5 percent return on equity earlier this week, just about making its cost of capital. Before the crisis, that number was above 30 percent.
UBS AG has bowed out of the bond trading business, once a must-have for any self-respecting Wall Street firm - and bankers and consultants say others are making similar assessments.
There is more to come. New global rules for bank capital known as Basel III will come into force in the United States next year, but regulators have already added so much on to the pact that the market has started talking about the next version.
"The question is, when will regulators actually term it as a Basel IV," said Hugh Kelly, a regulation expert at accountancy firm KPMG.
Regulators overseeing the implementation of financial reforms still have an enormous and complex task before them, and Wall Street's new approach plays to that reality. With constrained resources and limited time to get it accomplished, agencies are falling behind.
According to the law firm Davis Polk, regulators have missed 62 percent of Dodd Frank's 279 statutory rulemaking deadlines, and have not yet released proposals for 23 percent of them.
Fiscal constraints have made it difficult for agencies to hire staff or make investments in technology that are needed to implement new rules. Sometimes they are literally overwhelmed.
The CFTC's servers, for example, crashed when swaps dealers sent hordes of data about derivatives trading that the agency had requested. Shedding more light on the opaque derivatives market was a central tenet of the Dodd-Frank law, but it has been difficult for an agency that saw its tasks vastly expanded while its budget stayed the same.
Scott O'Malia, one of the CFTC's four commissioners, said the agency is still unable to analyze the data. With just a handful of people working on the problem, he expects it to take "a lot of time and a lot of staff effort" to fix it.
There is a less sunny view of the industry's rulemaking dialogue with regulators as well. Several sources referred to "regulatory capture" and "revolving doors," in which bankers become too friendly with regulators, who water down rules and later get cushy jobs on Wall Street.
People who have worked with regulators said agencies are open to hearing from banks and even request meetings, but ultimately come to their own conclusions. Regulators may ask questions but offer little guidance on where the rulemaking process is headed.
"In my experience and in listening to others with similar experiences, the regulators have been very smart about the process," said Edwards, who spoke generally about discussions with regulators and not about any specific bank. "They're taking the information gleaned during meetings, which is useful to them, but not taking it completely at face value."