| July 21
July 21 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
"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
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
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
'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
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."