11/08/2010 08:43 am ET Updated May 25, 2011

Regulators Face Pressure From Wall Street On Writing Rules

Regulators charged with fleshing out the Dodd-Frank financial reform are receiving intense pressure from Wall Street lawyers and lobbyists, the Wall Street Journal reports.

A lobbyist who was seeking to influence the implementation of the so-called Volcker rule, which limits taxpayer-backed banks' ability to make trades with their own money, recalls, according to the WSJ, that a Treasury regulator told him, "We take a view that the rule is more inclusive," to which the lobbyist responded, "Are you trying to scare me?"

Regulators at the Federal Reserve, SEC and Treasury Department, whose job is to write the more than 200 rules that will specify how the law is implemented, are accepting input from financial firms -- and the input is forceful. During a "comment period" that ended Friday, the WSJ says, these regulators received about 8,000 letters with suggestions on how they should do their job.

But, so far, they may be standing their ground. One regulator, the WSJ says, indicated he would follow Paul Volcker's lead when determining how the Volcker rule should be implemented.

Volcker, the former Fed chairman for whom the regulation is named, wants the implementation to be as general and as airtight as possible, the WSJ reported late last month. Already, the wording is weaker than Volcker had hoped, since it allows banks to invest up to three percent of their capital in private equity or hedge funds, instead of banning proprietary trading outright. The practices earned banks big profits and also saddled them with big risks in the years leading up to the financial crisis.

Michael Lewis, in a recent Bloomberg column, highlights specific ways that banks will sidestep the regulation by exploiting perceived loopholes in the law's wording. As long as banks can argue that trades are carried out on a customer's behalf, Lewis notes, they can get away with what typically would be considered proprietary trading.