The ‘Fire Sale’ Fears Driving Big Banks’ Push to Delay Volcker Rule

Goldman Sachs is required to sell much of the $7 billion currently invested in funds covered under a ‘Volcker Rule’ ban. Morgan Stanley has about $3.2 billion in such holdings.

Goldman Sachs (GS)  , Morgan Stanley  (MS) and other Wall Street firms are asking federal regulators for a five-year extension on selling billions of dollars in investments banned under post-financial crisis reforms because the markets for them aren’t liquid.

The holdings are covered by the Volcker rule, a provision of the Dodd-Frank Act best known for its ban on proprietary trading, that also bars federally insured banks from owning and making significant investments in private equity and hedge funds. Passed in 2010, the legislation is a pivotal part of Congressional efforts to prevent a recurrence of the 2008 crisis, when the government poured billions of dollars into financial institutions to prevent collapses that would further imperil the economy.

While the industry has made meaningful progress in complying with the Volcker Rule — named for former Federal Reserve Chairman Paul Volcker, who championed it — many firms are concerned that meeting a June 2017 deadline for disposing of certain assets would force them to take significant losses, according to people familiar with the matter.

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“If you go back to the genesis of Volcker, it wasn’t designed to force fire sales or anything like that,” Goldman CFO Harvey Schwartz said on an earnings call. As of the end of June, New York-based bank Goldman held about $7 billion in covered investments, much of which it would be required to sell under the rule, according to a regulatory filing. About $4.8 billion was in private equity funds and another $1.2 billion in real estate funds.

Morgan Stanley, also based in New York, said in its second-quarter filing with the Securities and Exchange Commission that it still had $3.2 billion in investments covered by the Volcker rule. While it expected to be able to sell most of them by the end of next June, or adjust them to comply with the law, it planned to seek additional time to exit “certain illiquid funds.”

A spokesman for the Federal Reserve, the regulator for major Wall Street banks, declined to comment on the matter. The central bank said in July that it would “provide more information in the near term” on how it would handle requests from financial institutions with illiquid investments.

The June 2017 deadline currently in place for funds covered under the law reflects the last of three one-year extensions authorized by legislators for investments made before the end of 2013. Further delays are allowed only for investments made before May 1, 2010.

Exiting illiquid holdings without heavy losses is a priority across the industry, not just for three or four firms. Many of them are working through the Securities Industry and Financial Markets Association, a Wall Street lobbying group with offices in New York and Washington, D.C.

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The organization seeks to “ensure that regulators have the data they need to adequately appraise the situation as the industry works to comply with the Volcker Rule and provide, as intended by Congress, an appropriate transition period to allow illiquid funds to wind down naturally,” according to a statement. Efforts to win a further deferral on compliance were first reported by Reuters.

JPMorgan Chase (JPM) , the biggest U.S. bank, didn’t actively pursue the extension because it was less affected by the new investment rules, the people said.
“The industry’s done a good job, as have we, of bringing down these levels,” Goldman’s Schwartz said on the call. “We’re sitting alongside our clients mostly in these funds, so, we don’t have unilateral authority just to sell these assets.”

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