Sen. Blanche Lincoln's derivatives-spinoff plan gains support in Congress

By Brady Dennis
Washington Post Staff Writer
Tuesday, June 15, 2010

An effort to force some of the nation's biggest banks to spin off their lucrative derivatives-dealing operations appears to be gaining traction, as members of a House-Senate conference begin finalizing details of far-reaching new financial regulations.

The measure, championed by Sen. Blanche Lincoln (D-Ark.), was included in the financial overhaul bill recently passed by the Senate. It had been opposed by Obama administration officials, some lawmakers in both parties, multiple banking regulators and Wall Street. Lincoln is seeking to restrict federal aid to banks that operate as major derivatives dealers.

If enacted, the controversial measure likely would mean a significant hit to the bottom line of big banks such as Goldman Sachs and J.P. Morgan Chase. At their most simple, derivatives are financial bets on the future value of something, such as airline fuel or mortgages.

Critics of the provision claim it could harm the competitiveness of U.S. banks by restricting their ability to help clients hedge risks, as well as possibly driving derivatives-trading operations into less-regulated overseas markets.

Lincoln's staff, however, has been circulating clarifications designed to assuage concerns about the measure and, aides said, knock down misconceptions.

According to the clarifications, Lincoln's measure would force bank holding companies to spin off their swaps operations outside their federally insured bank but allow firms to retain that business in a separate affiliate. It also would give holding companies two years to institute the changes, and essentially exempt all but the largest banks.

"We don't want to stop people from lending," said one Senate aide, who was not authorized to speak on the record. "We just don't want them to speculate."

Treasury officials have continued to oppose the provision, according to legislative aides, though the department has not commented on it publicly. In addition, top officials at the Federal Reserve and the Federal Deposit Insurance Corp. have expressed unease about it.

Yet two regional Fed presidents recently backed Lincoln's efforts, while Economic Recovery Advisory Board Chairman Paul A. Volcker has softened his earlier criticism that the provision was too sweeping. Sen. Christopher J. Dodd (D-Conn.), who quietly tried to forge a compromise on Lincoln's measure during the Senate debate, last week said that "at this point, I'm in support of what she has in the bill." Lincoln also has the enduring support of consumer advocates, and she has shown little inclination toward backing down in the wake of her recent primary victory in Arkansas.

Aides said lawmakers are likely to put off resolving the conflict until late in the House-Senate conference process.

Meanwhile, House Democrats offered Monday their first series of proposed changes to the legislation as lawmakers began reconciling differences in the bills passed by each chamber.

For instance, House members led by Rep. Barney Frank (D-Mass.), conference chairman, proposed striking a Senate provision championed by Sen. Al Franken (D-Minn.) that would set up a government panel to assign credit ratings. The measure was part of an effort to eliminate conflicts of interest between the agencies and the financial firms who pay for their ratings.

In addition to nailing down details on credit-rating regulations, the conference is slated Tuesday to discuss changes to new rules governing investor protections, banking supervision and the insurance industry.

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