Goldman Sachs has just a few more months to put its stamp on the Volcker rule, and it is not wasting any time.
The rule, designed to limit banks from speculating with their own money, will cost Goldman at least $3.7 billion in annual revenue, by one estimate. And billions more could be at stake if regulations now being drawn up are extra-tough.
The Volcker rule was one of the main topics on the agenda when Chief Executive Lloyd Blankfein met recently with U.S. Securities and Exchange Commission Chairman Mary Schapiro.
Wall Street chiefs do not often lobby top regulators directly, but this issue is unusually important to Goldman.
"They're totally freaked out about Volcker," said a Goldman lobbyist who declined to speak on the record for fear of losing the contract. "People are working on that a lot, with agency staff, with lawmakers, you name it."
Indeed, lobbying disclosures show Goldman representatives have been working both sides of the political aisle and meeting with top officials in the White House and regulatory agencies.
One big area of concern for Goldman is that regulators who are interpreting the Volcker rule will severely limit the amount of time a bank can hold a security or derivative. Positions held long term can be backstairs bets on markets.
The Volcker rule is not the only element of financial reform that Goldman is resisting. Important issues on its lobbying docket also include derivatives reform, capital requirements and bonus restrictions.
Other bank heads, including Morgan Stanley's James Gorman, have met Schapiro about the Volcker rule. But the provision is most important for Goldman, whose business is far more weighted towards trading, three lobbying sources said.
All Star Team
Goldman has hired an all-star team of lobbyists and former government officials, leveraging powerful connections to get its message across to regulatory and political leaders.
"Before the crisis, Goldman was basically non-existent in Washington," said a former Congressional staffer who now works as a policy analyst at a Wall Street bank. "Post-crisis, Goldman is everywhere."
Under last year's Dodd-Frank law, regulators have until July to come up with specific rules for implementing the Volcker provision, meaning banks have limited time to try to shape the regulations.
Adding to the complexity of lobbying efforts is the number of parties involved.
The SEC and four other regulators are in the process of writing separate versions of the Volcker rule, which must then be reconciled and shaped into a single set of regulations.
"Volcker is the subject of a very quiet, closed-door battle right now, not just between us and Wall Street, but among the agencies as well," said Bart Naylor, who has lobbied regulators for consumer-rights coalition Americans for Financial Reform.
Goldman Sachs spokesman Stephen Cohen declined to comment.
The impending changes have already spurred Goldman to dismantle much of its "proprietary trading" operations, which trade for the bank's own account.
These operations were some of the bank's most profitable, and their closure will erase about $3.7 billion in revenue and $1.5 billion in profit annually, according to an estimate by JPMorgan Cazenove analyst Kian Abouhossein.
By Abouhossein's reckoning, the bank gets another $17 billion of revenue from "market making," or linking up buyers and sellers across global markets. That revenue could also be squeezed, depending how stringent the regulations are.
Those figures represent about 65 percent of Goldman's annual revenue, according to Abouhossein's estimates.
Lawmakers say the Volcker rule will ensure that big banks are not gambling in markets, and that taxpayers will not be left on the hook when their bets backfire.
Implementing the Volcker rule will be tricky, though. When a bank buys a security from a client, it is difficult for a regulator to determine whether the bank is serving the client or betting on the market itself.
Limiting holding periods could be a simple way to ensure that banks are not making secret bets under the guise of helping clients.
Goldman argues that holding on to securities for a long period of time can be a crucial part of trading on behalf of customers because assets trade infrequently in some markets.
A substantial amount of the securities that Goldman trades seems to fall into the longer-term category. In a February presentation, Goldman said it held about a third of the securities and listed derivatives on its trading books for three months or more, and 8 percent for more than a year.
The bank did not disclose how long it holds unlisted derivatives positions, where it also has significant exposure.
Goldman is also advocating that regulators exclude currency contracts from the Volcker rule, in addition to Treasury bills and interest-rate swaps, which were excluded in the law.
"They definitely don't want their entire book to be micro-managed by the SEC," said a regulatory consultant who once worked at Goldman and is familiar with its lobbying efforts. "They want as much — I wouldn't say self-policing — but as much flexibility as possible."
In the years following the crisis, Washington has been reshaping the financial industry in an effort to prevent another collapse. Goldman has in turn been trying to shape the legislative and regulatory process.
The intensity of its efforts is evident in at least one concrete way: the amount of money it is spending on lobbying.
That figure totaled $1.32 million in the first quarter of 2011. That's 15 percent higher than the same period a year ago, putting the bank on course to break its annual record for lobbying expenditure of $4.61 million, set in 2010.
"They're a big and powerful company with a lot riding on financial reform," said Dave Levinthal, editor of OpenSecrets.org, which tracks lobbying and campaign spending.
"When monumental legislation like Wall Street reform gets passed, it's not only about the legislation when it's coursing through Congress, but how it's being implemented."
For Wall Street, where a bank can earn billions of dollars a year, a $5 million lobbying budget may seem paltry.
But in Washington it's a lot of money. And relative to revenue, Goldman's spending is exponentially higher than that of its competitors.
The bank has hired an all-star stable of Washington lobbying heavyweights.
Michael Paese, former deputy staff director for the U.S. House Financial Services Committee, heads its internal lobbying group. His team includes former staffers from the U.S. Senate Banking Committee, the White House and regulatory agencies.
Outside of its own payroll, Goldman also has several high-profile legislative veterans working on its behalf in Washington, hailing from both sides of the political aisle. Among them are former Republican lawmakers Trent Lott and John Breaux and former Democratic House Majority Leader Dick Gephardt.
It is common for large companies to seek influence in government, but old hands in Washington say Goldman stands out both in its wide network of high-level contacts and its ability to leverage those relationships to its advantage.
"The individuals at Goldman have been incredibly powerful over time," says Hillary Sale, a law professor at Washington University in St. Louis who specializes in Wall Street regulation. "When you're a consumer, it gives you the creeps thinking about that kind of influence over regulation. But from the bank's side, it's a perfectly smart strategy."
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