After vote, lawsuits likely next hurdle for Volcker rule

Sun Dec 8, 2013 8:16am EST
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By Douwe Miedema and Sarah N. Lynch

WASHINGTON (Reuters) - When U.S. regulators adopt the Volcker rule on Tuesday, they will make good on a promise by politicians to rein in banks' ability to gamble with their own money.

The coordinated action by five separate regulatory agencies is seen sparking a court challenge as Wall Street tries once again to avoid one of the harshest elements of the post-financial crisis crackdown.

The rule, championed by former Fed Chairman Paul Volcker, was a last-minute addition to the 2010 Dodd-Frank Wall Street reform law and takes aim at a business that had been a big money spinner for banks before the crisis.

The measure bans banks from making bets for their own profits, an activity known as proprietary trading that regulators deemed too risky for banks that enjoy government backstops.

But banks argue the roughly 800-page rule will hurt markets because it is virtually impossible to distinguish profit-seeking trades from those needed to hedge against risks or trades executed on behalf of clients.

"For something of this magnitude and this controversial ... there will be somebody who will challenge it," said Brian Cartwright, an advisor at consultancy Patomak Global Partners and a former general counsel at the Securities and Exchange Commission, one of the agencies voting on the measure.

Banks had hoped the rule would be watered down from when it was proposed more than two years ago, but JPMorgan Chase & Co's $6 billion loss in 2012 - named the London Whale after the giant trading bets the bank took - put an end to that speculation.

The final rule is expected to tighten potential loopholes, and could trim billions of dollars in annual revenues from large banks including Goldman Sachs, Morgan Stanley and JPMorgan.   Continued...

A New York City police officer stands outside the New York Stock Exchange, on Wall Street, May 14, 2012. REUTERS/Brendan McDermid