(Bloomberg News) The world's largest banks demanded a wish list of changes to a proposed U.S. ban on proprietary trading, seeking to escalate the lobbying effort against the Volcker rule five months before it takes effect.
In scores of comment letters filed yesterday, bankers and their trade associations said the rule would increase risk, raise costs for investors, hurt U.S. competitiveness and be vulnerable to legal challenge.
"Regardless of how the final rule turns out, it will be a shock to the U.S. financial system, as banking entities will need to take extraordinary measures to attempt to implement it," Barry Zubrow, executive vice president of JPMorgan Chase & Co. said in a 67-page letter. Goldman Sachs Group Inc. and Morgan Stanley submitted letters by midnight last night. Mark Lake, a spokesman for Morgan Stanley, and David Wells, a spokesman for Goldman Sachs, said the companies wouldn't publicly release or comment on the letters.
The rule, named after former Federal Reserve Chairman Paul Volcker, was included in the 2010 Dodd-Frank Act in an effort to restrict risky trading at banks that operate with federal guarantees. Five U.S. regulators released the 298-page proposal seeking comment on how it would affect market-making, liquidity, foreign institutions and private equity and hedge fund investments.
Volcker, 84, defended the rule in his own letter yesterday, challenging banks' arguments that the rule would hurt markets.
"The recent years of financial crisis have seen spectacular trading losses in large commercial and investment banks here and abroad," Volcker said. "Consequently, the stability of important banks was jeopardized, contributing to a financial crisis of historic dimension."
The restrictions may limit banks' trading profits -- once a prime source of Wall Street revenue. Banks including JPMorgan, Goldman Sachs and Morgan Stanley have shuttered or made plans to spin off their proprietary trading groups in anticipation of the rule. Citigroup is following suit, closing down its Equity Principal Strategies business, according to a memo by Derek Bandeen, head of equities for the New York-based bank, and obtained by Bloomberg News.
Standalone proprietary trading cost the six largest U.S. banks a net loss of about $221 million from June 2006 through the end of 2010, according to a July report by the Government Accountability Office.
Fourth-quarter earnings reported last month by the six largest U.S. banks show the industry suffered a third straight quarterly drop in combined trading and investment-banking revenue.
Trading Revenue Falls