I Know Nothing, But Citi Might Know A Lot

I’m loathe to lead a blog post by admitting ignorance, but here goes: I don’t know if the financial reform bill that emerged today would ban banks from sponsoring in-house private equity funds.

The original House and Senate language included such a ban, under the Volcker Rule rubric. The result likely would have been that banks like Goldman Sachs, Merrill Lynch and J.P. Morgan would have been required to divest existing operations (probably via a combination of management spinouts and secondary sales).

But it’s being suggested that the restrictions was stripped from the amended bill, which doesn’t seem to yet be publicly available (thus my ignorance). Instead, the only relevant language may be that banks — or certain banks, thanks to some weight-throwing by State Street lobbyist Sen. Scott Brown — can’t invest more than 3% of their capital into PE or hedge funds.

If such suggestions are correct, then it’s a huge win for banks. As John Carney correctly argues, they could continue to take their 2 and 20, without having to make major up-front commitments. Moreover, it wouldn’t touch the employee contributions that often flood into bank-sponsored PE funds.

But there is perhaps a larger issue if the bank-sponsored ban has been stripped: What did Citigroup know, and when did it know it?

Th WSJ reported last Friday that Citi was planning to raise up to $3.5 billion for in-house private equity and hedge funds. It was bizarre, considering that the original Volcker language was still intact at that point. Why would Citi raise new funds that it would soon be forced to divest? Maybe it expected a grandfather clause, but is it possible, just possible that Citi knew the language would be changed?

If so, Citi knew much more last week than I know today…

UPDATE: We still don’t have the bill, but it is indeed looking the the sponsor prohibition was stripped. Someone shot over this document, and said what came out of conference was virtually identical (at least in terms of this issue). Look at pages 13-14 for the relevant language.

Two interesting provisions we haven’t previously discussed: (1) Bank-sponsored funds would not be allowed to use bank brands in their name. In other words, no more Goldman Sachs Capital Partners. (2) Bank employees would not be allowed to invest in the fund, unless they are directly working on the fund. That’s pretty significant.

More to come if/when the Congressional Printing Office gets back from what is apparently an all-day lunch…