When Wall Street traders sense opportunity in the markets they pursue it with a sharklike intensity.
After scoring a victory in Washington that repeals a rule that the industry has long assailed, the large banks are most likely weighing where to strike next.
Wall Street won when the House of Representatives on Thursday passed a broad spending bill that contained a provision that rolls back a rule affecting derivatives, the financial product that helped cause the financial crisis of 2008. The Senate is expected to pass the budget legislation containing the repeal this weekend.
A repeal would show that, six years after the financial crisis, large banks have found a way to kill off regulations that were part of the Dodd-Frank Act, the sweeping legislation that Congress passed in 2010 to overhaul the financial system.
The House’s vote seemed to reverberate around Washington on Friday.
“I thought that, when Dodd Frank started, that the banks would not succeed in influencing it, having lost all the prestige they lost,” said Stanley Fischer, the vice chairman of the Federal Reserve, at a conference on Friday at the Peterson Institute for International Economics in Washington. “Boy, was I wrong,” he added.
Wall Street’s recent campaign also suggests that large banks now see fewer risks in openly fighting to overturn regulation. Citigroup, which received over $50 billion of bailout money after it nearly collapsed in 2008, helped write legislation that was behind the proposed repeal of the rule. And The Washington Post reported that Jamie Dimon, the chief executive of JPMorgan Chase, called lawmakers to express his support for the repeal. Only last year, Mr. Dimon was fighting to save his professional reputation after his bank racked up huge losses trading the type of instruments that the derivatives rule focused on.
In going after the rule, Wall Street used a well-orchestrated way to sway Washington.
The rule tried to chip away at some of the implied taxpayer subsidies that banks’ derivatives operations enjoy. Eroding such subsidies was a cause that Wall Street’s critics, like Senator Elizabeth Warren, Democrat of Massachusetts, could rally around.
But the regulation is arcane, and that created a problem for the opponents of the rule’s repeal. One way to stop Wall Street from killing off the rule was to vote against the whole spending bill and risk shutting down the government.
And it might have been hard for some members of Congress to contemplate going to such lengths for an esoteric measure, says Nolan McCarty, a professor of politics at Princeton. “It’s not the most important part of Dodd-Frank,” he said, “but the worst-case scenario is that they now have a playbook to go after the more important parts.”
There is no shortage of complex regulations in Dodd-Frank that the big banks want to eliminate or dilute.
They have, for instance, a special loathing for the Volcker Rule, which restricts banks from engaging in speculative trading. The Obama administration has trumpeted the Volcker Rule as a signature part of the overhaul. But for months, the banks have been lobbying the Federal Reserve to postpone by another year the date at which they must comply. A senior Fed official recently made remarks that seemed sympathetic to a delay.
Though securing such a concession might generate anger on Capitol Hill, the banks may now care less about such opposition. “You have a Senate that’s just changed hands, so that might change things,” said Donald N. Lamson, a partner at Shearman & Sterling, a law firm.
A victory over the derivatives rule would follow smaller — but still significant — gains for Wall Street in recent months. After strong pressure from the asset management industry, the Securities and Exchange Commission this year completed an overhaul of money market funds that fell well short of what other regulators had called for. In a gain for mortgage banks, the Federal Housing Finance Agency loosened contracts that demand that lenders take back shoddy mortgages that they might have sold to the government. Still, for the next couple of years, Wall Street may win only in smaller skirmishes, rather than the bigger battles.
The Obama administration strongly opposed the repeal of the derivatives rule. And parts of the spending bill will secure more money for regulatory agencies like the Securities and Exchange Commission and the Commodity Futures Trading Commission.
More broadly, the administration is expected to hold the line firmly on regulations that it says are crucial for the Dodd-Frank overhaul to do its job. The most prominent of these are capital regulations, which make banks stronger by demanding that they use less borrowed money to finance their lending and trading.
For instance, the Federal Reserve proposed increasing capital requirements for the country’s eight largest banks to levels that were substantially higher than in other countries. “That was by far the most important thing,” said Phillip L. Swagel, a professor of international economic policy at the University of Maryland, and an assistant secretary at the Treasury Department in the second administration of President George W. Bush.
Janet L. Yellen, chairwoman of the Fed, suggested that the Fed’s new capital rules might even prompt some large banks to shrink their operations. Indeed, after it was revealed that JPMorgan would theoretically need to increase its capital by least $20 billion under the new rules, banking analysts said that it might now make sense for the bank to pare back its activities.
Still, people who view Wall Street skeptically are unnerved by the campaign to repeal the derivatives rule. Professor McCarty was struck by how banks of different sizes seemed to work together to overturn the regulation. “That suggests there is a larger, longer-term strategy, in which the banks are going to work together,” he said.