Volcker Disappointed in His New Rule (XLF)

Bloomberg is reporting that former Federal Reserve Chairman, Paul Volcker, is highly disappointed in the new financial regulation rule that bears his name. The “Volcker Rule” was first pitched as a way to ban banks from running private-equity and hedge funds, which would have, theoretically, reduced the risk banks have on their balance sheets tethered to those investment vehicles.

However, a last minute change (horse trade) reconfigured the rule, which now allows banks to invest up to 3 percent of their capital in such funds.

Mr. Volcker did not expect the proposal to be diluted so much, while he is content with the language that bans banks from trading their own capital, a source close to Volcker said.

Bloomberg also reported that Democratic Senators Carl Levin of Michigan and Jeff Merkley of Oregon were also dissatisfied with the result, for the same reasons as Volcker, according to two people with knowledge of negotiations, speaking anonymously because they weren’t authorized to comment to the press. The two lawmakers introduced language that decreased the ability of regulators to water down a final version of the rule and provisions to prevent banks from bailing out failed hedge funds.

Financials (NYSE: XLF) initially rallied on the final version of the bill, but have since given up those gains.

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http://www.bloomberg.com/news/2010-06-30/volcker-said-to-be-disappointed...