Obama calls together congressional leaders in push for new financial regulation

President Obama speaks with congressional leaders, from left, Steny H. Hoyer, John A. Boehner and Nancy Pelosi at the White House.
President Obama speaks with congressional leaders, from left, Steny H. Hoyer, John A. Boehner and Nancy Pelosi at the White House. (Dennis Brack/pool)

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By David Cho, Brady Dennis and Scott Wilson
Thursday, April 15, 2010

The battle over reshaping the country's financial regulation escalated on several fronts Wednesday, with President Obama stepping up his personal efforts to win Senate passage of an ambitious bill while senators from both parties fought to claim the anti-Wall Street mantle.

After a White House meeting between Obama and congressional leaders, Republican leaders criticized the Democrats' proposal for leaving the door open to future bailouts of big financial firms. But the president, who has turned his attention to the financial overhaul after winning passage of health-care legislation, said he was confident that a bipartisan bill could be worked out to ensure that the economy is protected from the collapse of large financial companies.

Taking center stage in the fight over the legislation are exotic financial instruments known as derivatives. A Democratic senator who chairs a key committee is advocating new rules that would force the nation's largest banks to stop trading nearly all kinds of derivatives -- a move that would dramatically reshape several critical markets and deprive the firms of a major source of revenue.

The proposal by Sen. Blanche Lincoln (D-Ark.), who chairs the Agriculture Committee, sent shudders through Wall Street. For nearly two decades, five U.S. banks -- J.P. Morgan Chase, Goldman Sachs, Morgan Stanley, Bank of America and Citigroup -- have acted as middlemen, allowing commercial firms and financial speculators to trade vital goods such as oil, natural gas and cotton, as well as contracts called derivatives. These are essentially side bets on which way such commodities, stocks and other assets will move.

Under Lincoln's plan, as described by her aides, the companies would have to spin off that activity if they wanted to remain banks.

The proposal is tougher than what the administration has sought. The Senate bill, which largely reflects administration thinking, stops short of an outright ban on derivatives trading by the Wall Street companies. Lincoln's proposal, which her staff said is due out this week, could be added to that legislation.

"The dark days of deals are over," Lincoln said in a statement. "Financial institutions will have to decide if they want to be banks or if they want to engage in the risky financial trading that caused the collapse of firms" such as American International Group.

Derivatives have been traded on Wall Street for decades, but they exploded in popularity over the past decade with the help of big banks, which reaped a windfall in fees for their services. Some private research groups estimate that acting as middlemen -- "swap dealers," in Wall Street parlance -- generates $20 billion to $40 billion every year for large Wall Street firms. Trading in derivatives, which officials estimate have a paper value of half a quadrillion dollars, exacerbated the recent financial crisis.

The Senate and House agriculture committees have long played a leading role in the oversight of derivatives related to commodities. But the activity expanded well beyond trading in farm products, and most kinds of derivatives today are beyond the reach of regulators.

At the White House meeting, Obama said he would demand strong oversight of derivatives in the final bill. Derivatives, he said, should be brought "into daylight so that regulators and ordinary Americans know what's going on when it comes to this huge segment of the financial system."

Both the administration and Lincoln want derivatives to be traded on exchanges and approved by a clearinghouse that would cover losses in case one party to a derivative contract could not pay up. An exemption would be given to manufacturers and commercial companies, which often use derivative contracts to guarantee the delivery of a commodity at a set price and time.

Under Lincoln's plan, however, if these companies chose to trade in private, the decision could cost them more money. The firms could have to put up more capital to prepare for unexpected losses on any private trades. Lincoln's proposal would also force all derivative contracts to be made known to regulators and the public. The Senate bill, which was written in consultation with the administration, calls for making derivatives known only to regulators.


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