At the Finish Line on the Volcker Rule

Updated, 9:02 p.m. | Five years after the financial crisis, President Obama summoned regulators to the White House for an update on how they were changing the ways of Wall Street.

Gathered in the Roosevelt Room on a late summer afternoon, the regulators outlined their progress in carrying out the Dodd-Frank financial overhaul law, save for one crucial element: the Volcker Rule. The rule, a centerpiece of Dodd-Frank and a symbol of the Obama administration’s effort to rein in risk-taking after the financial crisis, was mired in delays, a victim of internal regulatory squabbling and fierce lobbying from the financial industry.

But when Treasury Secretary Jacob J. Lew spoke up, people briefed on the meeting recalled in recent interviews, he declared that the rule was too important to delay and that he wanted the deal done by the end of 2013. Mr. Lew, the people said, had also met privately with the rule’s namesake, Paul A. Volcker, the former Federal Reserve chairman who championed the rule’s ban on banks’ trading for their own gain.

Mr. Obama, striking a similarly urgent tone, emphasized that “it’s really important to make the deadline,” the people said.

On Tuesday, after a series of last-minute compromises and four other meetings with Mr. Lew, the regulators delivered. Five federal agencies approved the final rule, bolstering some provisions but leaving others open to loopholes, even as a winter storm threatened the Washington area and closed down much of the government.

An account of the negotiations that led to the votes, based on interviews with the people briefed on the matter who were not authorized to speak publicly, pulls back a curtain on the private negotiations to show how the regulators completed a rule that has divided Wall Street and Washington.

It also illuminates the hands-on approach that Mr. Lew — in contrast to the more low-key method of his predecessor, Timothy F. Geithner — adopted in the talks, as well as the behind-the-scenes role that Mr. Volcker and the president played. In addition to meeting with Mr. Lew, the 86-year-old Mr. Volcker met with President Obama in the Oval Office last week, the people said, one of four times they met to discuss the rule.

The votes on the rule represent a capstone for the most sweeping overhaul of regulation since the Depression. Although it came more than a year after Congress ordered the rule to be completed — dozens of smaller Dodd-Frank rules remain unfinished — the Volcker Rule became a barometer for the overall strength of the law.

The toughness of the rule fueled the internal wrangling at the five federal agencies. At one point, regulators were not accepting comments from one another, underscoring the tension surrounding the rule.

Some officials wanted to allow banks flexibility to carry out trading that is considered important for their health and the functioning of markets. But the Commodity Futures Trading Commission and Kara M. Stein, a Democratic commissioner at the S.E.C. who favors a strict Volcker Rule, worried that the compromises might open the rule to loopholes.

Ultimately, regulators adopted a harder line than Wall Street had hoped. The rule’s prohibition on banks trading for their own gain, a lucrative yet risky practice known as proprietary trading, became tougher as regulators took aim at the culture of Wall Street, requiring the banks to shape compensation packages so that they do not reward “prohibited proprietary trading.”

The rule also requires chief executives to attest every year to regulators that the bank “has in place processes to establish, maintain, enforce, review, test and modify” a program to monitor compliance with the rule, a requirement that did not appear in an October 2011 draft of the rule.

Once regulators released the final version, Mr. Obama declared: “Our financial system will be safer and the American people are more secure.”

But the rule has its limitations. For example, it allows banks to monitor their own trading for the most part. Some regulators at the F.D.I.C. also wanted chief executives to attest that their bank was actually in compliance with the rule, not just taking steps to comply.

In another concession to Wall Street, regulators will delay the effective date of the rule to July 2015. Until then, bank lawyers are expected to scour the rule for loopholes and weigh a lawsuit against the regulators.

Senators Carl Levin of Michigan and Jeff Merkley of Oregon, the Democrats who led the effort to insert the Volcker Rule in Dodd-Frank law, conceded that “no regulation is ever perfect” but argued that the “early indications suggest that persistence and common sense can prevail in the face of even the fiercest special interest lobbying campaigns.”

The rule emerged in fits and starts.

Soon after regulators produced a rough draft of the rule in October 2011, the negotiations appeared to break down. The Treasury Department held weekly meetings in the hopes of cementing a deal among the five agencies — the Federal Reserve, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission, the Commodity Futures Trading Commission and the Office of the Comptroller of the Currency — but midlevel officials remained locked in disagreement.

By fall 2012, the leaders of the agencies intervened. Daniel K. Tarullo, a Fed governor; Martin J. Gruenberg, the chairman of the F.D.I.C.; and Thomas J. Curry, comptroller of the currency, gathered over a series of lunches and breakfast meetings, to discuss the Volcker Rule, among other issues. They later involved senior staff, including Scott Alvarez, the general counsel of the Fed, and Paul Nash, the chief of staff at the comptroller’s office, to iron out many of the contentious details.

But the C.F.T.C.,which ignored the rule to focus on dozens of other Dodd-Frank regulations, was not yet on board. And when Mr. Lew arrived at the Treasury in February 2013, a deal was not in sight.

Mr. Lew’s dual role, as broker and peacemaker, began in earnest on his first day as treasury secretary. After being sworn in at the White House, Mr. Lew convened a meeting with the heads of the five agencies to take stock of the rule, the first of four such gatherings mostly held in his conference room overlooking the East Wing of the White House.

With each gathering, though a deal remained elusive, some progress was made.

“We need to put these pieces to bed,” Mary Jo White, the head of the S.E.C., said at one such meeting in June, according to the people briefed on the matter.

In July, Mr. Lew announced that he wanted the rule done by the end of 2013, a deadline he reiterated at the meeting with President Obama in August. And on visits to New York, Mr. Lew visited Mr. Volcker, seeking his feedback on the rule.

“My advice was, Keep doing it,” Mr. Volcker said in an interview on Tuesday.

But months later, the Federal Reserve, which coordinated the rewriting process, briefly stopped accepting comments from fellow regulators, the people briefed on the matter said. At the time, a senior official at the Fed handling the rule was on paternity leave.

When he returned, the negotiating gained steam. At a final Sept. 30 meeting in Mr. Lew’s conference room, as the government shutdown loomed, the regulators finally resolved one major piece requiring bank chieftains to attest to having a Volcker Rule compliance program. Long championed by Bobby Bean, an official at the F.D.I.C., and now supported by Mr. Lew, the regulators agreed to adopt the requirement.

Mr. Lew, urging the regulators to resolve their remaining differences during the shutdown, specifically called on them to prevent a repeat of JPMorgan Chase’s $6 billion trading blowup last year, the people said.

The bank built a sprawling proprietary position that spun out of control, but contended it was trading to hedge its broader risks. Based on a draft circulating at the time of Mr. Lew’s Sept 30 meeting, the people said, some regulators worried that the Volcker Rule would have allowed such trading to continue.

In response, Gary Gensler, head of the C.F.T.C., and Ms. Stein of the S.E.C. pushed to close potential loopholes. Ms. Stein circulated a four-page document outlining her requested changes to the rule. She also provided colleagues at the S.E.C. with a 40-point list of changes.

In recent days, with help from Ms. White and the other regulators, Ms. Stein secured agreements to insert many of her changes in the rule, the people said.

The alterations will require banks to identify risks that are “specific, identifiable” rather than theoretical and broad, which would have prohibited the trading that led to the JPMorgan blowup. The regulators also inserted into the rule a provision that requires banks to conduct “independent testing” to ensure that the trades used for hedging “may reasonably be expected to demonstrably reduce” the risks.

Even as the S.E.C. and C.F.T.C approved the rule, which is 71 pages and has a preamble of nearly 900 pages interpreting the rule, the regulators themselves split along partisan lines, with Republicans opposing a rule they say might stifle economic growth.

Wall Street also expressed displeasure with the rule. And in a statement, the Chamber of Commerce said it was “disappointed that regulators may have sacrificed an effective process that could have avoided adverse consequences for Main Street businesses.”

Mr. Volcker, however, remarked that he felt “quite satisfied.”

Michael D. Shear contributed reporting.