Proprietary Trading is a Source of Huge Bonuses for Goldman Sachs

Perhaps because the US Congress is so ideologically divided right now and because bi-partisan agreement on rules that will reform the financial system are so difficult to achieve, new rules that define the Dodd-Frank Bill go into effect only after years of lobbying by interested groups. Banks are against any rules governing proprietary trading because that is often their source of huge bonuses.

What happens when the rules governing the behavior of banks like Goldman Sachs are delayed for years and lobbied against incessantly during that time?  The rules can be watered down or be made more to the liking of opposing lobbyists.  We may find out by next year what the barrage of opposition by banks and corporations will actually mean.

From the following article we are not hopeful of an outcome that will be for the benefit of ordinary Americans:

Bank Lobby's Onslaught Shifts Debate on Volcker Rule
By Robert Schmidt and Phil Mattingly - Bloomberg

After a four-month lobbying blitz led by firms including Goldman Sachs Group Inc. (GS), JPMorgan Chase & Co. (JPM) and Credit Suisse Group AG (CSGN), U.S. regulators and lawmakers are signaling they’re receptive to delaying and revising their plan to stop banks from making speculative trades on their own accounts.

Representative Barney Frank, a Massachusetts Democrat and co-author of the 2010 law mandating the ban, urged regulators last week to simplify their first draft, while a bipartisan group of senators proposed pushing back its effective date.

Banking executives have long seen the rule as one of the most threatening parts of the Dodd-Frank regulatory overhaul, an assault on a lucrative line of business that comes branded with a name, that of ex-Federal Reserve Chairman Paul Volcker, garnering worldwide respect. Compliance and capital costs alone could reach $1 billion annually, the U.S. Office of the Comptroller of the Currency has said.

To make their case in Washington, banks and trade associations have been pressing a coordinated campaign to get regulators from five federal agencies to scale back the draft of the proprietary-trading rule issued in October, according to public and internal documents and interviews. They recruited money managers, industrial companies, municipal officials and foreign governments to their side.

“The regulators are under a lot of pressure,” said Marcus Stanley, policy director of Americans for Financial Reform, an advocacy coalition that filed a comment letter urging that the draft rule be strengthened rather than watered down.

Dimon’s Nudge

Stanley, a former congressional aide, said that his side has at most a couple of dozen people working the agencies and Congress. Meantime, he said, hundreds of banking representatives are enlisting their customers by warning that the rule’s fallout will be higher costs and less-liquid markets.

In one typical encounter at a public event late last year, JPMorgan Chief Executive Officer Jamie Dimon encouraged BlackRock Inc. (BLK) CEO Laurence D. Fink to weigh in, said two people familiar with the conversation who like others interviewed for this story spoke on condition of anonymity because the meetings were private. They didn’t give further details on the event.

Some banks recommended consultants and law firms, including Davis Polk & Wardwell LLP and Sullivan & Cromwell LLP (1147L), to help clients write letters arguing that the proposed language defines proprietary trading too broadly. Partnering with trade associations, the banks also commissioned studies, tested messages with focus groups, distributed talking points and set up a phone hotline for Capitol Hill staffers. 

Read the full article here