One of the last major agreements needed to approve historic Wall Street reform — a compromise on curbing risky bank trading — was close at hand as U.S. lawmakers moved toward melding three key proposals.
The end result would toughen a restriction on trading by banks for their own accounts, and add parts of another plan that would force them to spin off their swap-trading desks, said industry lobbyists and Democratic congressional aides.
By hardening the so-called "Volcker rule" on proprietary trading with proposals from senators Jeff Merkley and Carl Levin, and adding some of Senator Blanche Lincoln's swap-desk plan, lawmakers hope to shape a package that can become law.
Approval of a package that included even portions of Lincoln's hard-hitting plan would be a sharp rebuke to the banking industry, with far-reaching structural implications for some of Wall Street's largest and most storied institutions.
A senior aide said portions, at least, of Lincoln's proposal will be incorporated in the final bill — a prospect made more likely by her against-the-odds victory in a Democratic primary in Arkansas after a campaign that included a vigorous attack on politically unpopular Wall Street.
Banks are pushing back against new rules, with only days left before decisive action by a conference committee of the Senate and the House of Representatives, which will reconvene on Tuesday and hold more meetings over the next two weeks.
But time is running short for industry lobbyists and political momentum is trending against them, analysts said.
The Volcker rule — contained in the Senate's bill and not in the House's — would bar banks from doing "proprietary trading" for their own books unrelated to customers' needs, while limiting the future growth of the largest banks.
The rule was unveiled in January by President Barack Obama and White House economic adviser Paul Volcker, the former Federal Reserve chairman who argued for his proposal last week in meetings with members of Congress involved in the conference.
As passed by the Senate, the rule would have to undergo months of study by regulators, and be approved by a new inter-agency council, before it could be implemented. That approach made some lawmakers nervous, Merkley and Levin among them, who feared the rule could be watered down after passage.
They called for putting more statutory force in the legislation and giving clearer marching order to regulators.
Representative Barney Frank, conference committee chairman, told Reuters on Friday that the final bill will likely contain some form of the Merkley-Levin approach to the Volcker rule.
"That's how people are thinking about this now," said Frank, the Democratic chairman of the House Financial Services Committee and author of that chamber's Wall Street reforms.
Banks with significant proprietary trading revenues include Bank of America, Goldman Sachs, Morgan Stanley and JPMorgan Chase. Analysts at investment firm Keefe Bruyette & Woods said Goldman Sachs and Morgan Stanley could take the largest hit to profits if the rule is enacted.
The basic intent of the rule is to prevent banks that benefit from government protection — through deposit insurance and Federal Reserve discount window access — from pursuing risky trading strategies that jeopardize their stability.
Democratic Senator Jack Reed, an influential banking committee member, told reporters late last week that he backs the Volcker rule's goals.
He also offered words of support for Lincoln's proposal. "The Volcker rule is probably the place to begin," Reed said.
"You do not want to have speculative trading in a deposit-taking organization. And I think that's at the heart of Senator Lincoln's proposal," he said.
The position of Volcker, formerly an opponent of Lincoln's plan, has evolved, said a source familiar with his thinking.
He remains concerned about preserving banks' ability to hedge risk by using swaps and to help clients do the same. There is some debate about the plan's impact on this front.
The largely unregulated OTC derivatives market produced about $24 billion in industrywide revenues in 2009, with an estimated 98 percent of that total going to JPMorgan, Bank of America, Goldman Sachs, Morgan Stanley and Citigroup.
"Getting tough on reckless Wall Street practices is good public policy and it's what the public wants," said Ed Mierzwinski, consumer program director at the U.S. Public Interest Research Group, a public policy watchdog.
Lincoln's win "should help her help us defend her strong derivatives protections from the withering attacks by special interests seeking to weaken the Wall Street bill."
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