White House Signals It Won't Fight to Keep Rule on Derivatives

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But the White House itself worked hand-in-glove with the authors of the latter provision--known as the Volcker rule--and drew strict lines limiting its reach. The result is that even the principal proponents of Volcker on the Hill worry that it may be too riddled with loopholes to work effectively.

Conferees are working with a version of Volcker authored by Sens. Carl Levin (D-MI) and Jeff Merkley (D-OR), which was prevented by Republicans from receiving a vote on the floor. But that's just part of the story. Originally, Levin and Merkley had drafted a much tougher version of the Volcker rule--one that would have left big firms little wiggle room to gamble with their profits. With the White House's input, though, that amendment was modified, and, as written now, would exempt certain kinds of trades from the ban. For instance, if a firm contends that it's speculating activities are meant to hedge against its own risks, those trades could be exempted. That's not bad in principle, but the fear is that these firms will get away with defining a huge amount of speculative trading as risk-mitigating hedges. The Treasury Department has a more extensive view than do the authors of the bill of what constitutes a risk-mitigating hedge. And that, one Volcker rule supporter told me, is a loophole you can potentially drive all of Wall Street through.

Despite the controversy over the Volcker rule, administration officials say they are trying to stop lobbyists from weakening the bill. "The lobbying community is not done with its work, and they are very, very focused on the conference process, and we will be fighting any attempt to weaken the bills, will be taking every effort to strengthen the bills to make them good sound policy going forward," Michael Barr, Assistant Secretary of the Treasury for Financial Institutions, told reporters on Wednesday. And indeed they do play the part of bulwark against the final K St. push to influence legislators.

Still, the White House's influence on this issue is emblematic of its influence throughout the entire process. And the proof is in the pudding. Both the House and Senate have passed remarkably similar bills, both of which hew closely to a proposal the Obama administration put forth last year. That strong hand infuriated Republicans, and helped to keep the Senate's legislation from drifting in a Wall Street-friendly direction. But for those who want Congress to adopt a tougher set of financial reforms, it means they're squaring off against the White House.