Banks added to their wins in Washington this month by getting a reprieve from the Volcker Rule that will let them hold onto billions of dollars in private-equity and hedge-fund investments for at least two more years.
The Federal Reserve granted the delay after banks said selling the stakes quickly might force them to accept discount prices. Goldman Sachs Group Inc. has $11.4 billion in private-equity funds, hedge funds and similar investments, while Morgan Stanley has $5 billion, securities filings show.
“This is a great holiday present by the Fed,” said Ernest Patrikis, a former Federal Reserve Bank of New York general counsel who is now a partner at White & Case LLP.
Banks have had a good December in their efforts to ease burdens of the 2010 Dodd-Frank financial regulation overhaul. Last week, lawmakers repealed a restriction on derivatives trades that Wall Street had aggressively lobbied against.
Extending the Volcker deadline until July 2017 will let banks get out of their investments “in an orderly manner,” the Fed said in an order. It will “reduce the potential disruptive effects that significant divestitures of covered funds could have on markets,” the central bank said.
The Fed said it will grant back-to-back single-year extensions, as authorized by Dodd-Frank.
‘Eternal’ Lobbying
Before the 2008 financial crisis, banks purchased shares in thousands of private-equity and venture-capital funds. The Volcker Rule, named after former Fed Chairman Paul Volcker, sought to curb banks’ use of their own funds to make risky bets. The deadline to sell stakes underscored the tension regulators face between enforcing rules meant to ensure the soundness of the financial system and responding to banks’ complaints that many Dodd-Frank reforms aren’t workable.
The Fed said it will also consider whether to provide further extensions for the most illiquid funds. The central bank has authority under Dodd-Frank to give Wall Street an additional five-year delay for funds that would be the most difficult to sell.
“It is striking, that the world’s leading investment bankers, noted for their cleverness and agility in advising clients on how to restructure companies and even industries however complicated, apparently can’t manage the orderly reorganization of their own activities in more than five years,” Paul Volcker said in an e-mailed statement. “Or, do I understand that lobbying is eternal, and by 2017 or beyond, the expectation can be fostered that the law itself can be changed?”
Good Returns
Good investment returns may be another reason why banks want to hold onto their private-equity stakes, as the value of the holdings has rallied in the past year. Investors are willing to pay as much as 100 percent of the value of a buyout fund, up from a low of 40 percent in the first half of 2009, according to Cogent Partners, a Dallas-based investment bank that advises on the sale of private-equity stakes.
“The Wall Street Casino is alive and well,” Senator Jeff Merkley, a Democrat from Oregon, said in a statement after the Fed's decision. “This is wrong for taxpayers and it is wrong for the stability of our banking system. We expect more of the Federal Reserve.”
Banks have already sold off some funds because of Volcker, which restricts investments in private equity and hedge funds as part of a ban on lenders making market bets with their own capital.
Citing pressure from the rule, Citigroup Inc. spun off hedge-fund unit Napier Park Global Capital last year. Citigroup then agreed in August to sell 80 percent of its $1.5 billion stake in Metalmark Capital Partners II, a private-equity fund.
The bulk of Goldman Sachs’s banned investments are represented in its $7 billion in private-equity funds. The bank said the looming Volcker deadline meant it might have to sell investments for “less than the carrying value,” according to a Nov. 5 regulatory filing.
‘Broader Than Expected’
Morgan Stanley has $2.5 billion in private-equity funds and another $1.8 billion in real-estate funds, according to a Nov. 4 regulatory filing.
Bankers lobbied hard for the Volcker delay and had already submitted extension requests for individual funds. The Securities Industry and Financial Markets Association, Wall Street’s biggest lobbying group, released a survey in October showing that 14 of its members planned to seek for time for about 3,000 funds.
The Fed's order eases a wider range of fund restrictions than just those considered especially hard-to-sell.
“It’s much broader than most people expected,” said Douglas Landy, a partner at Milbank, Tweed, Hadley & McCloy LLP in New York. “I think they took to heart what banks said that this is a huge undertaking that is not necessary at this time.”
The central bank said its action also fulfills an April promise to grant a similar two-year delay for Volcker’s restrictions on collateralized loan obligations. The related Volcker ban on banks’ proprietary trading must still meet the July 21, 2015, deadline.
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