* Banks hit Volcker rule private equity, hedge fund curbs
* Frank sees Volcker's views on exemption push as pivotal
* Lobbyists seek "de minimis" exemptions to proposed rule
By Kevin Drawbaugh
WASHINGTON, June 15 Banks are pressing the U.S.
Congress for exemptions to a part of the proposed Volcker rule
under Wall Street reform legislation that would curtail their
ties to private equity and hedge funds, but the banks'
prospects were dimming on Tuesday.
Representative Barney Frank said opposition to exemptions
lodged by White House economic adviser Paul Volcker, author of
the proposed rule, will be pivotal as a Senate-House conference
panel considers the historic legislation.
"I think his view will be very influential," Frank, a
Democrat and chairman of the joint Senate-House panel, told
Reuters in an interview.
The fight has to do with a part of the Volcker rule that
would bar banks from sponsoring or investing in private equity
and hedge funds. The debate on the rule has largely has been
overshadowed by a focus on "proprietary trading" limits.
But the rule's proposal to divorce banking from private
equity and hedge funds "would likely have the most significant
immediate impact," especially for big banks, law firm Shearman
& Sterling said in an analysis last week.
If the rule is adopted as written, its limitations on bank
affiliations with funds "would require some form of divestiture
by the affected institutions," Shearman & Sterling said.
Over one-quarter of all private equity investments between
1983 and 2009 involved bank-affiliated private equity groups,
said a recent study by professors at Harvard University and
INSEAD, an international graduate business school.
Financial giants such as Goldman Sachs (GS.N), JPMorgan
Chase (JPM.N), Credit Suisse CSGN.VX and Citigroup (C.N) have
been deeply involved in private equity deals, the study said.
"This is a huge business," said Harvard Professor Josh
Lerner, a co-author of the study. "Bank-affiliated private
equity is like private equity on steroids."
He said the study showed that banks tend to pile into
private equity markets when they peak, aggravating volatility.
Banks have been asking for an exemption that would let them
continue to make small, or "de minimis," investments in funds,
which they say is key to their asset management business. Banks
say they need to invest in funds along with clients they steer
into the funds.
BNY MELLON: SKIN IN GAME IMPORTANT
"Institutional clients like pension funds and endowments
request specific investment strategies, and asset managers like
us create funds for them," said Bank of New York Mellon Corp
(BK.N) spokesman Kevin Heine.
"These clients generally want us to invest in these funds
so that we have 'skin in the game.' Another activity we provide
is seed capital for a new fund. Clients expect us to develop a
track record and then invite them to invest."
Along with Bank of New York Mellon, State Street Corp
(STT.N) and Northern Trust (NTRS.O) have been most active in
pursuing the issue, said two senior congressional aides.
"Many trust banks, including State Street, manage assets as
part of their normal activities," said State Street spokeswoman
Alicia Curran. "The proposed Volcker rule, while aimed at
eliminating risky or speculative activity by banks, could
negatively impact traditional bank asset management business."
Last month, Volcker wrote to lawmakers saying he firmly
opposed exempting banks from the rule that he and President
Barack Obama first unveiled in January. "I absolutely oppose
any such modification" Volcker said.
Volcker, a former Federal Reserve chairman who commands
deep respect on Capitol Hill, told CNBC on Monday: "The problem
with making exceptions with plausible cases by individual
institutions is once you begin, you can never stop.
"And if you make enough exceptions, you no longer have a
rule. ... We do not want, in my view, the United States
government implicitly standing behind the trading activities of
As Volcker's ban on proprietary trading by banks has looked
increasingly likely in recent weeks to become law, banking
lobbyists have redeployed resources on the funds issue.
CONFERENCE COMMITTEE RESUMES
On Tuesday, the conference committee resumed working on
merging reform bills already approved by the House and Senate.
A final package could go to Obama to be signed into law by the
end of the month, analysts have said.
"There has been an intense push to try to eliminate the
co-investment portions of the Volcker rule, or develop a safe
harbor or some sort of 'de minimis' exemption," said Raj Date,
executive director of the Cambridge Winter Center for Financial
Institutions Policy, a research group on financial oversight.
But he suggested that the banks' exemption idea is flawed
and may falter.
Clients are unlikely to be convinced that their interests
are aligned with their bank's, Date said, if the co-investment
involved is "de minimis," or not very important to the bank.
"It's sort of illogical on its face ... I'm hopeful that
this thing dies of its own weight," Date said.
(Editing by Leslie Adler)