Crackdown? Easy deal for US banks

A string of delays and extension periods written into a final version of Congress’s financial regulation reform bill means firms such as Citigroup and Goldman Sachs could exploit loopholes until 2022 before withdrawing from ‘illiquid’ funds such as private equity.

It was billed by Barack Obama as the toughest crackdown on Wall Street since the Great Depression. But top US banks could be given until 2022 to comply with the so-called Volcker rule, which is supposed to restrict financial institutions’ riskier trading activities.

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A string of delays and extension periods written into a final version of Congress’s financial regulation reform bill means firms such as Citigroup and Goldman Sachs could exploit loopholes until 2022 before withdrawing from ‘illiquid’ funds such as private equity.

The long gestation period is an example of the degree of compromise inserted into the package following months of lobbying on Capitol Hill by the banks.

“You can’t just say ‘stop’, you can’t just say ‘unwind,’” said Lawrence Kaplan, a lawyer at Paul, Hastings, Janofsky & Walker in Washington. Kaplan said the delay was a dose of political reality. “These things have contracts and detailed legal frameworks. You can’t undo them without doing considerable harm.”

The Volcker rule, championed by formed Federal Reserve boss Paul Volcker, stops banks from engaging in “proprietary trading” whereby they trade with their own capital, rather than clients’ money. It also severely restricts their investments in high-risk hedge funds and private equity.

But if they need to, they can apply for a three-year extension. On top of that, a five-year moratorium is available for ‘illiquid’ funds that are hard to unwind.