AFTER a year of lobbying, the big beasts of American banking could only sit and watch in the early hours of Friday morning as Congress finalised its finance reform bill.
A marathon 20-hour session sealed the draft version of the Dodd-Frank act, named after representative Barney Frank and senator Chris Dodd. Even as Dodd hailed the agreement between the House and Senate as a “great moment”, banking stocks began to soar. Traders realised some of the bill’s toughest provisions had been blunted by 11th-hour changes.
Bulge-bracket institutions will pay a one-off levy of $19bn (£12.6bn) over five years to cover the cost of tighter regulation. But they will be able to keep up to 70 per cent of their derivatives trading operations in-house and will be allowed sizeable investments in private equity and hedge funds. Key measures mean:
• under an amended “Volcker rule”, banks will be able to put up to three per cent of their tier one capital into proprietary trading and buyouts;
• over-the-counter derivatives will be forced onto clearing houses and exchanges, but banks will continue most of their derivatives activities to help clients manage risk;
• around a third of riskier derivatives activity, including trades in credit default swaps, will have to be spun out into separately capitalised units;
• Goldman Sachs and Morgan Stanley, which particularly rely on in-house trading for revenues, would be badly hit. The clampdown could shave up to 10 per cent from Goldman’s turnover. Goldman may have to withdraw some $10bn from its internal funds.
• an independent Consumer Financial Protection Bureau will tackle mis-selling of mortgages, credit cards and loans, while an über-regulator, the Financial Stability Oversight Council, will monitor companies;
• Washington will be able to seize and wind up failing outfits.
Dick Bove of Rochdale Securities summed up the sense of relief in the financial sector. “I would be buying bank stocks,” he said, suggesting banks would pass on extra costs to their clients and “get around” restrictions on proprietary trading.