Wall Street lobbies against Senate measures on derivatives

By Tomoeh Murakami Tse
Washington Post Staff Writer
Thursday, May 13, 2010; 6:01 PM

With the Senate in countdown mode for passing an overhaul of financial regulation, Wall Street executives and banking industry lobbyists are on the ground in Washington fighting a handful of measures that they say will hurt their industry and the broader U.S. economy.

At the top of their short list of targets is a proposal to prohibit banks from derivatives trading, a lucrative but largely unregulated business that has helped Wall Street firms such as Goldman Sachs report blockbuster profits. The big banks are also concerned about a proposed ban on proprietary trading, or speculative trading using their own capital.

A mere 34-words, the rule on derivatives sent shudders across Wall Street when Sen. Blanche Lincoln (D-Ark.) unveiled it April 16. Derivatives are financial instruments that allow investors to bet on the future direction of an asset -- such as a stock, bond or commodity -- and played a major role in the financial crisis.

Since then, senior banking executives and industry officials have privately called the rule "shocking," "ignorant," "dangerous" and "sheer stupidity" as they ratcheted up efforts to strike the measure, working with a small army of in-house government relations staff, elite Beltway lobbying shops and trade associations.

In meetings on Capitol Hill, lobbyists and banking executives are playing down the profits from derivatives trading, instead focusing on how the vast market benefits Main Street, for example by allowing banks to protect themselves from changes in interest rates on loans to individuals and small businesses. The banks argue that forcing them to spin off their derivatives businesses would hinder their ability to hedge everyday risks, which would result in less money available for lending and higher costs to customers.

Several senior industry executives, who spoke on the condition of anonymity so they could discuss the matter freely, say that based on recent meetings with congressional staff, they expect the rule to be dropped through backroom negotiations "in the dead of night with no recorded votes" on the measure. They say they are not letting up their efforts given the unpredictable nature of the proceedings and what is at stake.

"We're continuing to put forward our messages and arguments -- we're talking to everybody," said one lobbyist for a major bank, who followed the Senate proceedings on C-SPAN in an office littered with several copies of the phonebook-size bill covered in sticky notes. "We spend a lot of time with the moderates but we also don't think just because you're ideological that you can't understand rational arguments about the economy."

Initially targeted at party leaders and members of the Senate Agriculture Committee, which Lincoln chairs, the bankers' efforts have expanded to all but those lawmakers seen as the staunchest crusaders for Wall Street. Some lobbyists for large banks said they are increasingly appealing to moderate Democrats in the House as they look ahead to the process of reconciling the two versions of the bill after a Senate vote.

"It's very simple," said Scott Talbott, senior vice president for government affairs at the Financial Services Roundtable, which represents some of the nation's biggest financial companies. "When they're used properly, derivatives are best at managing risk that companies face every day, whether that's interest rates or pork bellies or fuel prices. If you eliminate derivatives, or the ability of companies to put together a derivative for you, then you have increased the risk that businesses face. You have ironically gone in the opposite direction of the bill."

Proponents of the rule say banks, which can raise capital more cheaply because of government protections, should use that money to engage in lending rather than speculating with the kind of risky securities that brought firms such as American International Group to the brink of collapse. Last year, derivatives trading generated nearly $23 billion for the nation's largest banks -- much of it by J.P. Morgan Chase, Bank of America, Goldman Sachs, Citigroup and Wells Fargo -- after their first-ever annual trading loss of $836 million in 2008, according to a government report.

While Republicans have criticized the measure and introduced amendments, no Democratic senator has publicly opposed it, which the lobbyists attributed to public anger with Wall Street and difficult election-year politics. They note that Lincoln, for example, faces a primary challenge next Tuesday from an opponent who has attacked her for being too accommodating to Wall Street interests.

The lobbyists, along with several industry executives, expressed particular frustration with the congressional delegation from New York, a state that draws considerable tax revenue from Wall Street and whose politicians have received generous contributions from the financial industry.

Aides to Sen. Kirsten Gillibrand (D-N.Y.), a member of the Agriculture Committee who voted for the broad derivatives legislation that includes the contentious provision, say that she has concerns about the measure's impact on lending but stopped short of opposing it.

"She shares some of the concerns that are being articulated by the administration," said Matt Canter, a spokesman for Gillibrand. "The debate is ongoing. There is a conversation. Her view is we need to address any outstanding questions about any of the provisions that are in the bill."

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