Regulators are confronting some 15,000 public letters attempting to influence the final shape of one of the most controversial elements of the 2010 financial reform bill.
Five regulatory agencies have until July to complete a new rule that would ban proprietary trading at Wall Street firms, a move that some believe would make the U.S. financial system safer. The rule named after former Federal Reserve Chairman Paul Volcker would stop banks from using their own money to trade for profit rather than fulfilling a client's order.
Banks, trading firms and critics of the financial industry have inundated regulators with letters and meetings before this week's deadline for public comment on the so-called Volcker rule. Trading operations have been among the most profitable divisions of the nation's largest banks in recent years, and the financial industry has spared no expense in fighting new restrictions.
But critics of the banks say that risky speculative trading was one of the factors that fueled the mortgage bubble and needs to be curtailed. Financial firms have also faced anger for betting against their own clients in pursuit of profit.
"The controversy over the Volcker rule is mud wrestling at its finest," said Michael Robinson, the former head of public affairs at the SEC who now works at Levick Strategic Communications. "There's a lot of money at stake and there is a lot of prestige at stake."
The passion on both sides of the issue — and the big money that is at stake — are evident in the 14,490 public comments that the SEC had received and posted on its website as of Tuesday. Thousands of those were from private individuals expressing their support for cracking down on Wall Street's risky trading practices.
For banks, the debate comes at a particularly sensitive moment. The last few months have been filled with news of layoffs and pay cuts on Wall Street as banks grapple with a raft of newly proposed regulations and continued economic turmoil in Europe.
The proposed Volcker rule puts a number of new limitations on the financial industry. Big banks would be able to own only small stakes in private equity and hedge funds and they would have to do away with any trading desks that trade solely for the profit of the bank.
Several financial firms, including Goldman Sachs Group Inc., JPMorgan Chase & Co. and Citigroup Inc., have already shut down the most obvious proprietary trading desks, but there are still big questions about how broadly the practice will be defined.
For example, market experts say that it is obviously proprietary trading when a bank buys 100 Italian bonds and holds them for a year, waiting for the value to go up. But what about when a bank buys 100 Italian bonds and holds them for five days until a customer shows up?
Banks and some of their customers have argued that the current proposal defines proprietary trading too broadly, potentially leading to lower trading volumes and higher costs for customers.
"The proposed rule would have serious, adverse effects on our ability to manage our risks and address the needs of our clients, and on market liquidity and economic growth," the chief risk officer at JPMorgan Chase & Co., Barry Zubrow, wrote in a 67-page letter submitted Monday.
One of the biggest institutional investors, the California Public Employees' Retirement System, acknowledged in its own letter that costs might rise, but noted that it would be an "acceptable cost for reducing risk in the financial system."
John Reed, the former chief executive of Citibank who once oversaw many of the trading operations now under discussion, said in his letter supporting the proposals that losses at proprietary trading desks during 2007 and 2009 had "quickly decimated the availability of credit and seriously damaged the U.S and global economy."
The most visible opponent of the banks has been Volcker himself, who first proposed the restrictions. He submitted his five-page letter to the SEC on Monday addressing concerns that the rule would drive up the price of buying and selling assets through the banks and make the markets less liquid.
"My short answer to each of these objections is: 'not so,'" he wrote.
Proprietary trading, Volcker said, is "at odds with the basic objectives of financial reforms: to reduce excessive risk, to reinforce prudential supervision, and to assure the continuity of essential services."
Many public comments have said that if anything, the rules don't go far enough, in part because of the influence that bank lobbying has already had. Two senators who originally pushed for the rule, Carl Levin (D-Mich.) and Jeff Merkley (D-Ore.), now say the rule does not go far enough. And a group called Occupy the SEC wrote a 325-page letter explaining the need for much stricter rules than those being proposed.
"The banking lobby exerted inordinate influence on Congress and succeeded in diluting the statute, despite the catastrophic failures that bank policies have produced and continue to produce," the group's letter says.
The new financial rules are set to go into effect this summer, whether or not regulators are finished. But that is unlikely to be the end of the story.
"You are going to see a lot of controversy on this going forward," Robinson said. "This is the kind of thing you can easily see ending up in court."