Alternatives

Banks may sue feds over the Volcker rule

With Washington bureaucrats devising all sorts of ways to regulate Wall Street, it is no wonder that there…

With Washington bureaucrats devising all sorts of ways to regulate Wall Street, it is no wonder that there are so many grumpy people at the industry’s chief trade group, the Securities Industry and Financial Markets Association.

Lobbyists there are irritated with a proposed Labor Department rule concerning financial advisers that competes with a similar one contemplated by the Securities and Exchange Commission. They are angry with edicts set to take effect this summer that would require banks to spin off some of their derivatives-trading business.

But nothing gets SIFMA leaders foaming at the mouth more than the Volcker rule, which, if adopted, would restrict banks from using their capital to gamble in the markets. It would also rein in other risky activities, such as investing in hedge funds and private equity.

“I never thought it was necessary,” SIFMA chief executive T. Timothy Ryan Jr. harrumphed at a press conference this month.

For now, SIFMA and other bank lobbyists are working behind the scenes to water down the much-delayed rule before it is put in place, supposedly this year. If SIFMA can’t sufficiently weaken the rule, look for the group to sue to block it.

Banks usually acquiesce after their regulators spell out the rules of the road. But in recent years, Wall Street has begun turning to the courts to halt regulations it doesn’t like.

HIGH STAKES

One reason is that the stakes are so high. A good 80% of the $50 trillion global debt market fell under the initial draft of the Volcker rule, according to a 2011 analysis by Sanford C. Bernstein & Co. Inc.

Litigation over the rule seems likely, if only because business groups have used the courts to block several financial reforms.

For example, in late 2011, SIFMA and another banker group, the International Swaps and Derivatives Association, sued the Commodity Futures Trading Commission over a rule that would have set limits on speculative futures trading. In September, a federal judge ordered the CFTC back to the drawing board.

In 2010, the U.S. Chamber of Commerce and Business Roundtable sued the SEC over a new rule aimed at making it easier for shareholders to unseat corporate directors. An appeals court vacated the rule in 2011.

But the Volcker rule has a special place in bankers’ hearts because it reaches deeply into what they care about most: their pay.

Recall that making enormous bets fueled with debt or derivatives was a much bigger business for a handful of large banks last decade than making loans or taking companies public. The Volcker rule seeks to curtail those activities, which means banker bonuses would fall, too.

Mr. Ryan is leaving his SIFMA job next month to become head of regulatory strategy and policy at JPMorgan Chase & Co. Inc.

He said this month that it is premature to discuss a lawsuit, as the Volcker rule isn’t finalized yet.

Aaron Elstein is a senior reporter at sister publication Crain’s New York Business.