The Obama administration is backing off a plan to bar commercial banks from engaging in proprietary trading, favoring instead a watered-down version of a key tenet of the proposed “Volcker rule” governing how banks operate, according to people familiar with the situation.
Sources told The Post that instead of issuing an outright ban on prop trading — or trading done on behalf of only the bank itself — the White House will propose that federally insured banks keep higher cash reserves if they want to run such trading desks.
The about-face comes amid signs the administration faced an uphill battle selling lawmakers and Treasury officials on an outright ban.
President Obama on Jan. 21 proposed sweeping banking industry reform, outlining plans that would bar a bank from owning, investing or sponsoring hedge funds or private equity funds, and running trading operations that did not specifically serve customers.
The proposals went by the shorthand name “the Volcker rule,” as they were championed by former Federal Reserve Chairman Paul Volcker.
However, in the month since the announcement stunned Wall Street, sources said Volcker’s ideas have been “marginalized” and are not expected to figure prominently in whatever the Senate formulates in the coming days.
“My understanding is the White House really does believe in it, but Treasury and the Hill do not, so it’s not going very far,” said one person close to the Treasury Department.
Added another source, “the White House is looking to save face” by backing a proposal with fewer restrictions.
“The administration will spin the compromise as a way to add safety to proprietary trading,” a source said. “But this is a fundamentally different approach to regulation [than what Obama proposed].”
Said a Treasury spokeswoman: “We continue to work with congressional members from both sides of the aisle to bring financial reform across the finish line — and to do all that we can to ensure that the American people are never again forced to suffer the consequences of a preventable financial catastrophe.”
The Volcker rule had problems almost from the start, with Volcker and Deputy Treasury Secretary Neal Wolin having difficulty explaining the proposal and its necessity to the Senate Banking Committee.
What’s more, Committee Chairman Christopher Dodd is said to dislike the proposal, recently calling it “transparently political and not substantive.” In addition, Treasury Secretary Tim Geithner has been described as “lukewarm” to the proposal.
And even as a group of former Treasury secretaries, including John Snow, George Schultz and Paul O’Neill, threw their support behind the prop-trading ban, Volcker himself is said to be only somewhat optimistic about his proposal’s chances, with a person close to him saying, “He’s kind of wait and see.”
Nevertheless, several sources added that Volcker is speaking regularly to Geithner trying to gain favor. And, sources noted, Republican Finance Committee Chairman Richard Shelby supports the Volcker rule.