Lawyers Get an Earful After Obama Calls for New Bank Regulations

Lawyers Get an Earful After Obama Calls for New Bank Regulations

Zach Lowe
The American Lawyer
January 25, 2010 

It has been a monumental 10 days or so for financial-regulation experts, and things peaked on Thursday when President Obama announced plans to restrict the trading activity of banks, limit consolidation in the finance industry and prohibit banks from owning interests in hedge funds or private equity funds.

Since then, the phones have been ringing off the hook as banks try to understand the proposals, pitch possible amendments and suss out their potential impact on foreign banks with operations in the U.S.

"Some of it is frankly venting," says Bradley Sabel, a partner at Shearman & Sterling who has represented the Royal Bank of Scotland and Morgan Stanley, among others. "There is just disbelief that these proposals could actually be happening and questions about whether they have any chance to pass."

Obama has said his proposals amount to reviving "the spirit" of the Glass-Steagall Act, and lawyers we talked to say the idea (announced Thursday) of a ban on owning, investing or even advising hedge or private equity funds was the most surprising development. "Thursday was different," says Gary Rice, a partner at Simpson Thacher & Bartlett. "The proposals today drew an immediate reaction from lots and lots of people. Not just banking types but people in the private equity world trying to figure out what this might mean." Goldman Sachs, which became a bank-holding company in a pinch during the economic crisis, has a huge private equity business, and JP Morgan Chase's private equity fund manages $8 billion of investments and commitments for the bank, according to The New York Times. Overall, banks and investment banks account for about 9 percent of the capital invested in PE funds, the NYT says.

Though foreign banks such as Deutsche Bank have cut back their private equity involvement sharply in recent years, non-U.S. banks with subsidiaries in the U.S. are in a unique position of uncertainty, according to Sabel, Rice and Robert Tortoriello of Cleary Gottlieb Steen & Hamilton. Banking jurisdictions in the European Union support universal banking, meaning they allow banks to engage in a full range of commercial and speculative activities. Foreign banks are wondering: If the U.S. renews the separation of investment and commercial banking here, would that rule change apply only to the U.S.-based subsidiaries of foreign banks or to the global operations of those banks? If it's the latter, some foreign banks might contemplate exiting (at least physically) the U.S. market, Tortoriello says. "That would be great news if you're a London fan," he says.

Foreign banks are already "apoplectic" about Obama's proposed tax on financial institutions with more than $50 billion in assets, Tortoriello says. (By his calculation, about a dozen foreign companies would be subject to the tax, along with about 40 U.S. financial institutions.) Many foreign banking clients are not thrilled with the idea of paying a tax designed to repay U.S. taxpayers for expenses affiliated with a bailout program closed to foreign banks, Tortoriello says.

But fear not: Banking lawyers and lobby groups such as the Institute of International Bankers are already mobilizing to fight the new regulations and pitch amendments to the tax, lawyers say. (Richard Coffman, the IIB's general counsel, was not immediately available for comment.) One possible amendment gaining steam among banks and their lawyers, Sabel says: A tweak that would allow financial institutions to deduct U.S. government securities in their tax calculations. Without such an amendment, Sabel says, the biggest finance shops might exit the government securities market.

Mostly, though, lawyers are cautioning their anxious banking clients to be patient, they say. Obama's statement on Thursday was high on rhetoric and short on specifics, and lawyers say they expect a long battle to determine what any final legislation might look like.

But it's clear that finance lawyers -- a group that already racked up a huge number of billable hours from the bailout -- will continue to be busy.

This article first appeared on The Am Law Daily blog on AmericanLawyer.com.