Scott Brown's key vote gives Massachusetts firms clout in financial overhaul
Wednesday, June 23, 2010
State Street isn't one of the iconic firms of Wall Street. It doesn't even make the top 10 largest bank holding companies in the country. But on Capitol Hill this week, as lawmakers finalize new rules regulating Wall Street, Boston-based State Street wields enormous influence.
The bank has a powerful advocate: Sen. Scott Brown (R-Mass.), whose vote the Democrats need to pass the financial overhaul bill. Brown is worried that a key provision in the regulations known as the "Volcker rule" would hurt State Street, BNY Mellon and other banks with major operations in his state. Even though Democrats have fought to include a strong version of the rule, which could restrict the kinds of trading banks engage in, Obama administration officials and Democratic aides on Capitol Hill say Brown is likely to get his way because his vote is critical for approval of the House-Senate draft.
If he does, many other banks across the country could benefit.
As the bill comes down to the wire, an array of industries is lobbying lawmakers involved in the House-Senate conference committee. Yet only a few key issues are still in play, and Brown is making sure his is one of them.
"It's definitely crunch time," a senior administration official said. "If you want anything, you have to fight for it now . . . but most of them are grasping at pretty thin straws."
State Street's concerns center on the effect that the Volcker rule, crafted by former Federal Reserve chairman Paul A. Volcker, would have on its business running stock and money market mutual funds, which represent a particularly large part of its operations. State Street and other banks that are deeply involved in such funds say they could be precluded from using their own money to start them.
Even before the Senate bill was finalized last month, lobbyists for State Street and BNY Mellon made several visits to Capitol Hill, pressing lawmakers to modify the Volcker rule and presenting language they wanted instead, aides said.
"We don't disagree with the premise of the Volcker Rule proposal--that banks should be prohibited from speculative activity using the banks' balance sheet," State Street said in a statement. "We do, however, believe that banks should be able to continue to offer traditional asset management and banking services under conditions that are consistent with the goal of the rule."
Brown has taken up the banks' cause, arguing that they should be allowed to invest at least a small amount of capital into their own funds; he presented an amendment to allow banks to invest up to 5 percent of their capital. Negotiators are still settling on a number, which could be as low as 2 percent, according to lobbyists and congressional aides.
The effort by key Democrats -- Rep. Barney Frank (Mass.) and Sen. Christopher J. Dodd (Conn.) -- to appease Brown is kicking up some controversy. There are concerns from liberal Democrats such as Sen. Carl M. Levin (Mich.) that larger banks like J.P. Morgan Chase and Goldman Sachs will be able to exploit any changes in the Volcker rule to benefit their own activities, unrelated in many cases to the mutual fund business. Some critics say that State Street is the perfect example of a bank that required taxpayer bailouts during the financial crisis because the firm engaged in the kind of risky trading the Volcker rule is designed to stop.
Lawmakers are still negotiating the exact language for the rule, and Brown has another concern about it that Democrats are also trying to address. He is urging that the restrictions should not apply at all to nonbank mutual funds and insurance companies. Fidelity Investments and the Massachusetts Mutual Life Insurance Co. are major employers in Brown's state, and supporters of the exemption say that mutual fund and insurance companies had nothing to do with the financial crisis and should not face added regulation.
A spokesman for Brown said his office is not crafting language or looking for carve-outs.
Raj Date, chairman of the Cambridge Winter Center for Financial Institutions Policy, said State Street should not be overlooked by regulators. Date, who recently wrote a report called "Test Case on the Charles: State Street and the Volcker Rule," argues that when State Street's investments in asset-backed securities went bad during the financial crisis, the bank made up for the losses by moving funds out of healthier activities, putting the entire firm at risk and endangering those it did business with. The firm also received federal bailout funds.
A State Street spokesman said that new accounting rules, which are separate from the financial regulation bill, would prevent the company from again shifting funds between activities as it did previously. The spokesman also said State Street did not want bailout funds but was asked by federal officials to take them.
Brown's office is asking top Democrats to "keep their commitments," an allusion to an agreement he reached with party leaders during Senate debate on the bill. In exchange for his vote, only one of four from Republicans, Democrats said they would make his suggested changes at the conference committee.
Staff writers David Cho and Brady Dennis contributed to this report.