* Blankfein met with Schapiro to discuss Volcker rule
* Holding period limits of particular concern to Goldman
* Goldman on track to break its 2010 lobbying spend record
By Lauren Tara LaCapra
NEW YORK, May 4 Goldman Sachs Group Inc (GS.N)
has just a few more months to put its stamp on the Volcker
rule, and it is not wasting any time.
The rule, designed to limit banks from speculating with
their own money, will cost Goldman at least $3.7 billion in
annual revenue, by one estimate. And billions more could be at
stake if regulations now being drawn up are extra-tough.
The Volcker rule was one of the main topics on the agenda
when Chief Executive Lloyd Blankfein met recently with U.S.
Securities and Exchange Commission Chairman Mary Schapiro.
Wall Street chiefs do not often lobby top regulators
directly, but this issue is unusually important to Goldman.
"They're totally freaked out about Volcker," said a Goldman
lobbyist who declined to speak on the record for fear of losing
the contract. "People are working on that a lot, with agency
staff, with lawmakers, you name it."
Indeed, lobbying disclosures show Goldman representatives
have been working both sides of the political aisle and meeting
with top officials in the White House and regulatory agencies.
One big area of concern for Goldman is that regulators who
are interpreting the Volcker rule will severely limit the
amount of time a bank can hold a security or derivative.
Positions held long term can be backstairs bets on markets.
The Volcker rule is not the only element of financial
reform that Goldman is resisting. Important issues on its
lobbying docket also include derivatives reform, capital
requirements and bonus restrictions.
Other bank heads, including Morgan Stanley's (MS.N) James
Gorman, have met Schapiro about the Volcker rule. But the
provision is most important for Goldman, whose business is far
more weighted towards trading, three lobbying sources said.
For a graphic showing Goldman's spending on lobbying click
For a graphic showing spending on lobbying by Wall Street
banks see r.reuters.com/ruk39r
ALL STAR TEAM
Goldman has hired an all-star team of lobbyists and former
government officials, leveraging powerful connections to get
its message across to regulatory and political leaders.
"Before the crisis, Goldman was basically non-existent in
Washington," said a former Congressional staffer who now works
as a policy analyst at a Wall Street bank. "Post-crisis,
Goldman is everywhere."
Under last year's Dodd-Frank law, regulators have until
July to come up with specific rules for implementing the
Volcker provision, meaning banks have limited time to try to
shape the regulations.
Adding to the complexity of lobbying efforts is the number
of parties involved.
The SEC and four other regulators are in the process of
writing separate versions of the Volcker rule, which must then
be reconciled and shaped into a single set of regulations.
"Volcker is the subject of a very quiet, closed-door battle
right now, not just between us and Wall Street, but among the
agencies as well," said Bart Naylor, who has lobbied regulators
for consumer-rights coalition Americans for Financial Reform.
Goldman Sachs spokesman Stephen Cohen declined to comment.
The impending changes have already spurred Goldman to
dismantle much of its "proprietary trading" operations, which
trade for the bank's own account.
These operations were some of the bank's most profitable,
and their closure will erase about $3.7 billion in revenue and
$1.5 billion in profit annually, according to an estimate by
JPMorgan Cazenove analyst Kian Abouhossein.
By Abouhossein's reckoning, the bank gets another $17
billion of revenue from "market making," or linking up buyers
and sellers across global markets. That revenue could also be
squeezed, depending how stringent the regulations are.
Those figures represent about 65 percent of Goldman's
annual revenue, according to Abouhossein's estimates.
Lawmakers say the Volcker rule will ensure that big banks
are not gambling in markets, and that taxpayers will not be
left on the hook when their bets backfire.
Implementing the Volcker rule will be tricky, though. When
a bank buys a security from a client, it is difficult for a
regulator to determine whether the bank is serving the client
or betting on the market itself.
Limiting holding periods could be a simple way to ensure
that banks are not making secret bets under the guise of
Goldman argues that holding on to securities for a long
period of time can be a crucial part of trading on behalf of
customers because assets trade infrequently in some markets.
A substantial amount of the securities that Goldman trades
seems to fall into the longer-term category. In a February
presentation, Goldman said it held about a third of the
securities and listed derivatives on its trading books for
three months or more, and 8 percent for more than a year.
The bank did not disclose how long it holds unlisted
derivatives positions, where it also has significant exposure.
Goldman is also advocating that regulators exclude currency
contracts from the Volcker rule, in addition to Treasury bills
and interest-rate swaps, which were excluded in the law.
"They definitely don't want their entire book to be
micro-managed by the SEC," said a regulatory consultant who
once worked at Goldman and is familiar with its lobbying
efforts. "They want as much -- I wouldn't say self-policing --
but as much flexibility as possible."
In the years following the crisis, Washington has been
reshaping the financial industry in an effort to prevent
another collapse. Goldman has in turn been trying to shape the
legislative and regulatory process.
The intensity of its efforts is evident in at least one
concrete way: the amount of money it is spending on lobbying.
That figure totaled $1.32 million in the first quarter of
2011. That's 15 percent higher than the same period a year ago,
putting the bank on course to break its annual record for
lobbying expenditure of $4.61 million, set in 2010.
"They're a big and powerful company with a lot riding on
financial reform," said Dave Levinthal, editor of
OpenSecrets.org, which tracks lobbying and campaign spending.
"When monumental legislation like Wall Street reform gets
passed, it's not only about the legislation when it's coursing
through Congress, but how it's being implemented."
For Wall Street, where a bank can earn billions of dollars
a year, a $5 million lobbying budget may seem paltry.
But in Washington it's a lot of money. And relative to
revenue, Goldman's spending is exponentially higher than that
of its competitors.
The bank has hired an all-star stable of Washington
Michael Paese, former deputy staff director for the U.S.
House Financial Services Committee, heads its internal lobbying
group. His team includes former staffers from the U.S. Senate
Banking Committee, the White House and regulatory agencies.
Outside of its own payroll, Goldman also has several
high-profile legislative veterans working on its behalf in
Washington, hailing from both sides of the political aisle.
Among them are former Republican lawmakers Trent Lott and John
Breaux and former Democratic House Majority Leader Dick
It is common for large companies to seek influence in
government, but old hands in Washington say Goldman stands out
both in its wide network of high-level contacts and its ability
to leverage those relationships to its advantage.
"The individuals at Goldman have been incredibly powerful
over time," says Hillary Sale, a law professor at Washington
University in St. Louis who specializes in Wall Street
regulation. "When you're a consumer, it gives you the creeps
thinking about that kind of influence over regulation. But from
the bank's side, it's a perfectly smart strategy."
(Editing by Ted Kerr)