Banks worry that Volcker Rule might become a Volcker Law

Although, it is still unclear what role the Volcker rule will play in the final financial regulation bill, banks are beginning to face the idea that the Volcker rule might become the Volcker law.

The Volcker rule, named after former Federal Reserve Chairman Paul Volcker, has been advocating an aggressive reform for Wall Street: to re-draw the line between commercial and investment banking.

Since the repeal of the New Deal-era Glass-Steagall Act in 2000 deposit-taking institutions have been allowed to make money not only the old-fashioned way — lending it out at interest — but also by running hedge funds and other speculative means. Mr. Volcker argued that, since their deposits are federally insured, the big banks were encouraged to take bigger risks for which the taxpayers would ultimately take the hit. He insisted that this incentive structure was not only unfair but also at the root of the current crisis. Correcting it, he argued, is the key to preventing future crises.

For months, Mr. Volcker’s ideas made no impact on Obama administration policy. However, recently it is gaining popularity among the lawmakers. While the specific role of the Volcker rule in final bill is being negotiated, banks are no longer so confident that they’ll be able to hold on to their alternative investment businesses under it.

In its strictest form, the rule would bar bank holding companies from owning, investing in or sponsoring hedge funds or private equity funds. Big banks, such as JPMorgan Chase and Goldman Sachs, have hedge fund units that manage tens of billions of dollars. According to some analysts, this could create a huge fire sale.

So far, the banks themselves dismissed the idea that the government would force them to sell or unwind their hedge fund and private equity units. JPMorgan, which has nearly $30 billion in hedge fund and private equity assets, said the Volcker rule would have no impact on its holdings, because both its private equity unit and Highbridge Capital Management hedge fund manage money only for clients.

However, now, according to various news sources, they sound less confident. For example, Mary Sedara, a JPMorgan spokeswoman, told Fox that the interpretations of this rule change by the week and different lawyers say different things. The language as it is now written isn’t definitive. Others are even more pessimistic, noting that the rule, as currently written, would completely bar banks from any alternative investments activities.