Covington & Burling has crafted the first court salvo in the battle over the newly-enacted Volcker Rule. On Tuesday the firm asked for an emergency injunction on behalf of the American Bankers Association and four community banks, claiming that a portion of the rule should be struck down for violating the Administrative Procedures Act.
The 25-page lawsuit asserts that the Volcker Rule would compel the plaintiffs and other banks to divest an obscure debt instrument called TruPS-backed CDOs, which are collateralized debt obligations backed by trust-preferred securities. This divestment would force them to recognize “significant and unexpected losses” by writing down the value of these investments by the end of this year, the plaintiffs claim. The lawsuit names as defendants three of the five entities that formulated the rule: the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency.
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