WASHINGTON — Congressional negotiators writing new Wall Street rules are trying to find acceptable limits on some of banks' most profitable ventures – speculative trading with their own money, managing hedge funds and private equity investing.
The Obama administration says those new restrictions would reduce the kind of risky practices that could threaten the entire financial system.
Democratic Sen. Chris Dodd of Connecticut, the chairman of the Senate Banking, Housing and Urban Affairs Committee, is both trying to strengthen and weaken parts of the proposal to win votes from fellow senators for the final product.
House and Senate negotiators were working to blend House and Senate bills overhauling Wall Street rules in time for President Barack Obama's meeting with the Group of 20 nations this weekend in Toronto.
But limits on how banks do business remained a significant sticking point. Dodd said he still had to balance the policy of the bill with his need to hold 60 votes in the Senate.
"That's the job of a chairman here, to try to pull this together and get them lined up so the substance and the politics work," he said. "I'm not there yet."
For example, Sen. Scott Brown, R-Mass., worries that the plan would hurt Boston-based State Street Corp., a bank holding company with about $150 billion in assets. State Street provides asset-management activities and its business in investments such as mutual funds could fall under limits as proposed under the Volcker Rule, named after its leading advocate, former Federal Reserve Chairman Paul Volcker, now an economic adviser to President Barack Obama.
The House and Senate negotiators were preparing a compromise that would exclude mutual funds from the restrictions. Also, bank holding companies could engage in some trades in derivatives, which are complex securities used to ensure against market fluctuations, as a hedge against risk but not for speculation.
Under consideration, too, was a plan to let banks invest in hedge funds and private equity funds, within certain limits.
"We have a duty reconciling the need to reduce risk and excessive volatility but also not damaging the business models of entities that were safe and secure," said Rep. Barney Frank, D-Mass., the chairman of the negotiating committee.
Negotiators were also working to toughen other provisions.
The Senate's bill gives regulators leeway to study how the rule could be changed and put into place. But Senate Democrats readied a proposal by Democratic Sens. Jeff Merkley of Oregon and Carl Levin of Michigan that would ditch that discretion for regulators and give them specific instruction to implement the final trading rules.
They also would prohibit banks from betting against investments they assemble for clients, a reaction to the Securities and Exchange Commission lawsuit against Goldman Sachs.
Senate Democrats also are working on a proposal championed by Sen. Blanche Lincoln, D-Ark., that would require banks to spin off all their derivatives business into separate affiliates with their own funding sources. That provision could run headlong into the adjustments Democrats are making to the Volcker Rule.
Frank, in a meeting with Dodd and Lincoln in House Speaker Nancy Pelosi's office Wednesday, voiced some frustration with Lincoln's stance because it has drawn opposition from moderate Democrats in the House and from members of the New York congressional delegation, according to people familiar with the meeting. They requested anonymity to discuss a private meeting.
Lincoln also won a compromise on a plan by Sen. Susan Collins, R-Maine, that would force banks to stop using certain hybrid securities in their reserve funds to protect against losses.
House and Senate Democrats, at Lincoln's request, agreed to allow bank holding companies with assets less than $15 billion to grandfather in any of those securities already in their reserves. The largest bank in Lincoln's home state, Arvest Bank Group Inc., falls in that category.
Under a Senate proposal, bigger banks would have to replace their reserves with other liquid assets within five years. A House proposal would phase in large banks of more than $100 billion over seven years and banks with assets between $15 billion and $100 billion would phase in over 10 years.
House negotiators agreed to drop their demand for a $150 billion fund to cover costs of liquidating large, failing institutions. That was an important demands of some Senate Republicans, including Maine's Olympia Snowe, to maintain support for the bill.
The House version would have required large banks to pay a fee to finance the $150 billion liquidation pool. The Senate bill did not.
The new House proposal still calls for a liquidation fund that would be created with taxpayer money borrowed from the Treasury when a large institution fails.