Process of financial reform for US banks enters final phase

A YEAR-LONG financial reform effort in the US approached the finishing line yesterday with Wall Street banks braced for an expensive restructuring intended to prevent any repeat of the 2008 financial crisis.

The final days’ arguments have centred on proposed limits for derivatives dealing and the Volcker rule that prevents banks from proprietary trading and restricts their relationships with hedge funds and private equity firms.

The core of the reform is already fixed – a new resolution authority to allow the government to wind down any future failing institution like Lehman Brothers safely and without wider damage to the financial system.

Regulators are also being charged to look beyond their silos and to monitor “systemic risk” of the sort that emerged in subprime mortgages and swept through global finance. But yesterday was again distinguished by private meetings and public theatre as Democrats scrabbled for votes.

The party’s leadership conceded to demands by Scott Brown, an important Republican senator, to allow banks to invest 3 per cent of their capital alongside clients in hedge funds.

Resisted by Tim Geithner, the treasury secretary, who had wanted a lower limit, and Paul Volcker, former Federal Reserve chairman, the concession was made reluctantly by Barney Frank, the House financial services chairman, and Chris Dodd, the Senate banking committee chairman, in pursuit of the 60 Senate votes needed for passage. That was all behind the scenes – true of most of the substantial action in a supposedly transparent “conference” process to merge two financial reform Bills.

The House of Representatives passed its version late last year; the Senate followed last month.

During the week in which Wimbledon saw the longest professional tennis match in its history, the conference has had its own seemingly interminable back and forth, with Republicans repeatedly trying to refocus the debate on Fannie Mae and Freddie Mac, the mortgage guarantors seized by the government at the height of the crisis – even though there is now no chance of reforms to the institutions being inserted into the Bill.

It has been a turgid process that many Democrats regret. “We can have the public debate and our staff can do the real work while we’re talking,” said Mr Frank, half-joking. The cause of transparency has been served indirectly, however, by exposing to public scrutiny the cast of influential characters who usually lobby in private.

With proceedings scheduled to run late into last night, Gary Gensler, chairman of the Commodity Futures Trading Commission, entered and he sidled up to Linda Robertson, Federal Reserve congressional liaison. Later Mr Gensler, who has sought to push strict rules in regard to derivatives, was engaged in conversation with the unlikely pairing of Richard Shelby, senior Republican on the Senate banking committee, and an aide to Blanche Lincoln, the Democratic Senate agriculture committee chairwoman pushing to force banks to spin off their swaps desks.

Scott Alvarez, the Fed’s wiry general counsel, was leafing rapidly through legislative text with his staff. Kim Wallace, the treasury’s assistant secretary for legislative affairs was talking to Courtney Geduldig, the banking aide of Bob Corker, a Republican member of the Senate banking committee.

Mere allusions were made in public to the real battles taking place in private. “There’s more than one path to get to 60 and it is fascinating to watch a few senators . . . over one issue potentially hijack the process,” said Mr Corker as he held out the prospect that he could vote in favour of the Bill.