(Corrects to say banks could invest up to 3 percent of their
Tier 1 capital, not their tangible common equity, in hedge
funds and private equity funds)
* Lawmakers agree to tougher trading ban, with exceptions
* Banks can retain most swaps-dealing operations
* Obama will tout reform at G20 meeting
* Last minute deals lift bank stocks
(Adds remarks from Obama, Sen. Lincoln, analyst; updates
By Charles Abbott and Andy Sullivan
WASHINGTON, June 25 U.S. lawmakers hammered out
a historic overhaul of financial regulations as dawn broke over
the nation's capital on Friday, handing President Barack Obama
a major domestic policy victory on the eve of a global summit
devoted to financial reform.
In a marathon session of more than 21 hours, legislators
agreed to a rewrite of Wall Street rules that may crimp the
industry's profits and subject it to tougher oversight and
To secure agreement, lawmakers reached deals in the final
hours on the most controversial sections which restrict
derivatives dealing by banks and curb their proprietary trading
to shield taxpayer-backed deposits from more risky activities.
Banks will be allowed to keep most swaps dealing activity
in-house, although the riskiest trading would be pushed out.
They will also be permitted small investments in hedge funds
and private equity funds.
The concessions could lessen the impact on bank
profitability. U.S. bank stocks opened about 1.0 percent higher
.BKX, with Goldman Sachs Group Inc (GS.N) stock up about 2.0
percent in early trade.
The most sweeping rewrite of financial rules since the
1930s aims to avoid a repeat of the 2007-2009 financial crisis,
which touched off a global recession and led to taxpayer
bailouts of floundering financial giants. Financial
institutions would have to pay $19 billion to cover the costs.
The reforms must still win final approval from both
chambers of Congress before Obama can sign them into law,
giving Wall Street one final chance to deploy its army of
lobbyists on Capitol Hill. Quick approval is expected and the
reform could go to Obama for his signature by July 4.
Democrats had raced to complete their work before Obama
left for a weekend meeting of the Group of 20 economic powers,
where he can tout the changes as a blueprint for other
"This crisis proved and events continue to affirm that our
national economies are inextricably linked and just as economic
turmoil in one place can quickly spread to another, safeguards
in each of our nations can help protect all nations," Obama
said at the White House shortly before departing.
Despite last-minute deals, the bill has actually gotten
tougher in its yearlong journey through the halls of Congress.
Democrats rode a wave of public disgust at an industry that
awarded itself rich paydays while much of the country struggled
through a deep recession caused by its actions.
"There is no way to view this bill as a positive for the
financial sector," wrote Concept Capital analyst Jaret
The KBW bank stock index fell 10.4 percent in May this as
the reform process gained steam, its worst month since October
of last year, and the capital markets index .KSX fell 10.3
percent, its steepest drop since January 2009 when the crisis
reached fever pitch.
Passage of the bill will give Democrats an important
legislative victory, alongside healthcare reform, ahead of
congressional elections in November. The House could vote as
soon as Tuesday, Representative Barney Frank, who chaired the
negotiating committee, said.
CURBS ON RISKY TRADING
Lawmakers munched chocolates to stay awake as regulators
and administration officials hovered in the wood-paneled room,
and as the night wore on, they yielded the microphones to staff
to debate the bill's finer points.
The panel completed its work just after 5:30 a.m. (0930
GMT), more than 21 hours after it sat down to its final
Along the way, the negotiators resolved several sticking
points that had threatened to scuttle the bill.
They agreed to water down a proposal by Democratic Senator
Blanche Lincoln that would have required banks to spin off
their lucrative swaps-dealing desks to a separately capitalized
Dozens of House of Representatives Democrats said Lincoln's
proposal would force trading to move overseas, and threatened
to vote against the bill if it included the provision.
The compromise allows banks to stay involved in
foreign-exchange and interest-rate swaps dealing, which account
for the bulk of the $615 trillion over-the-counter derivatives
They also could participate in gold and silver swaps and
derivatives designed to hedge banks' own risk.
They would need to spin off dealing operations that handle
agricultural, energy and metal swaps, equity swaps, and
uncleared credit default swaps.
"Quite frankly, common sense prevailed," said Lincoln,
chairman of the Senate Agriculture Committee, shortly after
agreement was reached on the bill. "Our objectives were to get
the risky stuff out of banks. We figured out how to do that."
Lawmakers resolved another controversial element of the
bill around midnight when they agreed that banks should face
restrictions on their risky trading activities.
As with Lincoln's swaps provision, the financial industry
won significant last-minute concessions in that rule, named for
White House economic adviser Paul Volcker.
The final version of the Volcker rule would give regulators
little wiggle room to waive the trading ban but would also
allow banks to invest up to 3 percent of their Tier 1 capital
in hedge funds and private equity funds.
The bill would dramatically reshape the financial landscape
in the United States.
"Onerous legislation is baked into the price if you look at
any large-cap bank names," said Weston Boone, managing director
and position trader for large-cap banks at Stifel Nicolaus in
Baltimore. He said smaller banks fared better.
The legislation sets up a new consumer-protection authority
and gives regulators new power to seize troubled financial
firms before they harm the broader economy.
Though it leaves largely intact the patchwork of federal
regulators that failed to stop the last crisis, it sets up an
interagency council to monitor system-wide risks to stability.
It forces much of the over-the-counter derivatives market,
which worsened the financial crisis and led to a $182 billion
bailout of insurer AIG, onto more accountable channels like
clearinghouses and exchanges.
Larger banks face will have to raise more capital to help
them ride out future crises.
Credit-rating agencies such as Moody's Corp could see their
business models upended by regulators seeking to resolve
conflicts of interest, while debit-card issuers like Bank of
America will probably have to reduce the transaction fees they
charge merchants who use their cards.
(Additional reporting by Roberta Rampton, Rachelle Younglai
and Kevin Drawbaugh, Deborah Charles and Tabassum Zakaria in
Washington, and Rodrigo Campos in New York; writing by Andy
Sullivan and Tim Ahmann; Editing by Alistair Bell and Jackie