By Brady Dennis
Washington Post Staff Writer
Wednesday, June 9, 2010; 9:43 PM
Sen. Blanche Lincoln's narrow victory Tuesday in the Democratic primary in Arkansas triggered a new round of speculation about a proposal for the financial overhaul bill that she has been pushing for back in Washington.
Lincoln, chairwoman of the Senate Agriculture Committee, is the chief advocate of a measure in the Senate bill that could force some of the nation's biggest banks to spin off their lucrative swaps desks. The provision is not in the House legislation and has faced opposition from administration officials, Wall Street lobbyists and top lawmakers from both parties.
But consumer advocates have stood by Lincoln's effort, which seeks to separate risky derivatives trading from federally insured firms and, in her words, "ensure that banks get back to the business of banking."
Derivatives -- complex contracts that allow traders to bet on the direction of prices of stocks, commodities and other assets -- have ballooned into a $600 trillion global market in recent years. Largely unregulated and opaque to the public, derivatives exacerbated the financial crisis by amplifying risk within the system and threatening numerous firms whose fates became intertwined because of the massive number of deals they did together.
Many observers have assumed for months that Lincoln's bold measure would get dropped from the far-reaching legislation. But despite the fervent opposition, it survived the Senate process. Had Lincoln lost her primary race, the conventional wisdom went, the chances of her derivatives provision getting dropped in the coming House-Senate conference committee would increase, as she no longer would have the political motivation to be seen as a crusader against Wall Street.
In a statement Wednesday, Lincoln said: "Reforming Wall Street is about restoring the American people's confidence in our financial system. I will continue my effort to pass strong Wall Street reforms and fight attempts to weaken this bill."
Lincoln's derivatives proposal allowed her campaign to tout how tough she was on Wall Street in general, but the technical details of the provision itself were never the stuff of campaign commercials and stump speeches in Arkansas.
Lincoln has insisted all along that she would fight to keep her spin-off measure in the final bill, not because of her tough reelection bid, but rather on the principle that taxpayers should not be left on the hook again for a bank's risky derivatives trades that go wrong.
Still, no matter the outcome in Arkansas, Lincoln's measure always faced a battle to overcome objections from Obama administration officials and skeptical fellow lawmakers, as well as the lobbying blitz from Wall Street representatives arguing that the move could lead banks to shift trading operations overseas and push other U.S. companies to do business foreign financial instititions. Sen. Judd Gregg (R-N.H.) has called the proposal an ill-thought-out idea, saying it would push business offshore and restrict Main Street businesses' access to credit.
But Lincoln's measure has supporters among some fellow lawmakers, consumer advocates and economists. Nobel Prize-winning economist Joseph Stiglitz on Wednesday called the Lincoln provision "an absolutely essential part of protecting our financial system . . . it protects the taxpayers and the investors."
Some critics said Lincoln's provision would be unnecessary if lawmakers retain or even strengthen a separate measure that would prohibit banks from trading on their own accounts, an activity known as proprietary trading. Stiglitz disagrees. "I think that's fundamentally wrong. They should be seen as complementary," he said. "Both are needed."
The Lincoln provision sits atop the list of issues that conferees must resolve in coming weeks, but it represents only one of many. Lawmakers must resolve differences over the structure of a new consumer protection watchdog, as well as the details of new powers that will allow the government to seize and dismantle large, failing firms.
Among other issues, the nation's auto dealers are pushing to preserve an exemption in the House bill that would free them from oversight by the new consumer watchdog. The banking industry also is hoping to strip out a Senate measure that would limit the fees that banks can charge retailers when customers swipe their credit or debit cards.
House Financial Services Committee Chairman Barney Frank (D-Mass.) and Senate Banking Committee chairman, Christopher J. Dodd (D-Conn.) plan to hold an opening hearing Thursday, followed by a series of public sessions later in the month. They have said they hope to finish work on a final bill and send the legislation to the president's desk by July 4.