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BlackRock, Pimco and Elliott submit wish lists for finance rule changes

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BlackRock wants Congress to change an aspect of the Volcker Rule that is causing headaches within its hedge fund business. Billionaire Paul Singer wants risky derivative bets curtailed and says regulators should lose their authority to step in when large banks are failing. Uber Technologies says Washington should eliminate red tape that makes it difficult for the private ride-hailing company to issue shares to its drivers.

These are just a few of the wish list items that corporations, banking trade groups and consumer advocates have submitted to Congress as the Senate considers overhauling financial rules. Mike Crapo, the Republican chairman of the Banking Committee, and Sherrod Brown, the panel’s top Democrat, began taking suggestions earlier this year as they work to craft legislation that spurs economic growth.

There were more than 130 proposals posted on the Senate Banking Committee’s website last week. The range of ideas illustrates how difficult it’s going to be for lawmakers to write a bill that pleases everyone, including Democrats who are hesitant to reduce oversight of Wall Street.

Attention is focused on what Crapo will do after the House passed legislation June 8 that would rip up much of the 2010 Dodd-Frank Act, and the Treasury Department released a report this week with dozens of recommendations for making financial regulations less burdensome on banks.

Here are some of corporate America’s ideas:

The world’s largest asset manager is one of the biggest players in finance. But its ask on Dodd-Frank consists of a pretty small tweak to the Volcker Rule, a regulation hated on Wall Street that restricts banks from making risky market bets with their own capital.

BlackRock is targeting the part of Volcker that limits banks’ investments in hedge funds and private-equity firms. An “unintended consequence” of the rule is that it will force the money management industry to change the names of hundreds of funds, BlackRock wrote in an April 26 letter to Crapo and Brown. The letter was also signed by TIAA, French asset manager Natixis and UBS O’Connor, a hedge fund firm affiliated with the Swiss bank.

In implementing Volcker, regulators barred hedge funds from carrying the names of banks because they didn’t want investors to assume lenders were ultimately on the hook for losses if things went wrong. Also, a hedge fund failure can be a pretty embarrassing event. So government officials thought banks — in an effort to protect their reputations — might feel pressure to rescue hedge funds that bear their names.

For BlackRock, this is where the situation gets weird. PNC Financial Services Group, the nation’s second largest regional bank, owns more than 20% of BlackRock shares. From the Federal Reserve’s perspective, that makes BlackRock a PNC subsidiary.

BlackRock has concluded that under Volcker, funds are not only restricted from sharing names with banks, but also the subsidiaries of banks. So BlackRock hedge funds and private equity firms technically can’t carry the name BlackRock, due to the company’s relationship with PNC.

“The naming prohibition extends to separately incorporated investment advisers” even if “the investment adviser has a different name than the bank,” BlackRock and the other firms wrote in their letter. To comply with Volcker, companies have to rename affected funds by July 21, the letter added.

What’s in a name? To BlackRock, calling a hedge fund by any other name would be a big pain in the neck.

Singer has never been shy about ripping Dodd-Frank, but not because he thinks it was too hard on Wall Street. Rather, the big GOP donor has long criticized Washington’s response to the 2008 financial crisis as a missed opportunity to address what he says caused the meltdown: Giant banks were too leveraged and their balance sheets were too opaque.

Actively managed funds saw the majority of the largest outflows this year as investors flocked to less expensive passive alternatives.
June 14

In a 2011 letter to investors in his hedge fund firm, Elliott Management, Singer said actions taken during the Obama administration consisted of “an ideological wish list and cronyism,” and the lavishing of “dollops of close-to-free money” on the biggest lenders.

So it’s not a surprise that he wants Congress to do away with what’s known as Dodd-Frank’s orderly liquidation authority, which gave regulators new powers to unwind troubled banks. In an April 19 letter to Crapo and Brown, Singer said government officials were inappropriately granted the right to seize “massive financial institutions” largely based on their own judgments of whether a lender faces danger. The system hurts investors that do business with banks because they have little control over the process, he added.

Singer’s view puts him at odds with many on Wall Street, as banks and shareholders generally like the assurance the liquidation authority provides that lenders won’t collapse in a chaotic fashion. Republican lawmakers and the Trump administration are on Singer’s side, arguing the Dodd-Frank powers, if they are ever used, will lead to another taxpayer bailout.

Singer also wants Congress to toughen rules for derivatives and make trading more transparent. Singer has previously said that while he loves trading derivatives, he broadly thinks the benefits of the instruments don't make up for the risk they’ve injected into the financial system.

Uber’s submission shows you don’t have to be a Wall Street banker to care about financial regulations.

The company wants to give shares to its drivers, who are independent contractors, not employees. The hiccup is whether it’s legally permissible to hand out stock without drivers paying for it, Uber said in its April 14 letter.

Uber said it has been discussing the issue with the SEC since last year. The company provided Crapo and Brown with draft legislation that it believes would allow the greatest number of drivers to participate in a stock offering, the letter said.

Pimco, which is one of the biggest investors in bonds tied to home loans, offered suggestions for reviving a market that has been on life support since the financial crisis: mortgage securities that aren’t backed by the government.

Leading up to the crash, banks made a lot of money issuing subprime mortgages and then packaging them into bonds they sold to investors such as Pimco. The arrangement allowed lenders to transfer risk and recoup money that was used to make more loans.

But many mortgages went to borrowers who couldn’t repay their debts. Critics say the shoddy underwriting practices and run-up in home prices fueled an unsustainable housing bubble that led to record foreclosures and big losses in the bond market.

Dodd-Frank tried to fix this issue by requiring risk-retention rules that force banks to hold on to some of the debt. The theory was that banks wouldn’t issue as many faulty loans if they had skin in the game.

Pimco argued in an April 14 letter to Crapo and Brown that things haven’t worked out as planned. The risk-retention requirements have had a “chilling effect” on the market for mortgage bonds that lack a government guarantee, making it difficult for many credit-worthy borrowers to get financing, Pimco said. The restrictions don’t apply to bonds issued by Fannie Mae and Freddie Mac, and they should be scrapped for other companies too, Pimco said. It added that other Dodd-Frank rules requiring banks to prove borrowers can repay their mortgages offer enough protection.

Pimco also wants rules changed that enable borrowers to seek legal damages against bond investors. While borrowers who default should be allowed to file lawsuits against lenders for bad underwriting practices, they shouldn’t be permitted to sue firms that buy mortgage securities, Pimco said.

Bloomberg News