New Democrat Coalition opposed to derivatives-spinoff plan
Friday, June 18, 2010
A provision in financial overhaul legislation that would force the nation's largest banks to spin off profitable derivatives-trading operations continues to divide lawmakers on Capitol Hill, most recently drawing criticism from a group of business-friendly Democrats.
The measure, proposed by Sen. Blanche Lincoln (D-Ark.), would restrict federal aid to banks that operate as major derivatives dealers and could result in a sizeable hit to the bottom line of firms such as Goldman Sachs and J.P. Morgan Chase. It has been opposed by Obama administration officials, some lawmakers in both parties, multiple banking regulators and Wall Street.
Despite the opposition, the measure had been gaining support, particularly after Lincoln's staff circulated clarifications aimed at easing concerns that the provision could harm the ability of U.S. banks to help clients hedge risks and drive derivatives-trading operations into less-regulated foreign markets.
Two regional Fed presidents backed Lincoln's efforts, and White House economic adviser Paul A. Volcker softened his earlier criticism that the provision was too far-reaching. Even Sen. Christopher J. Dodd (D-Conn.), who tried to engineer a compromise on Lincoln's measure during Senate debate, said he is "in support of what she has in the bill."
But, in a letter to the leaders of a House-Senate conference working to resolve differences over new financial regulations, 43 members of the New Democrat Coalition -- self-described as "moderate, pro-growth members of Congress" -- argue that the controversial measure "would increase systemic risk by forcing derivatives transactions into less-regulated and less-capitalized institutions and impede effective regulatory oversight of the derivatives market."
Opposition from the group, which has voiced support for much of the financial overhaul package, presents a potential hurdle as House and Senate leaders try to hold together enough votes to pass a final bill through Congress.
"It would be a tragedy if, in the service of Wall Street interests, a few Democrats sabotaged the hard work by the White House and the majorities in both houses of Congress to get a final strong bill passed and to the president," Heather Booth, director of the advocacy group Americans for Financial Reform, said Thursday. "We urge the conference chairmen to resist their efforts."
Lincoln's measure also was criticized Thursday in a letter from the Coalition of Derivatives End-Users, a group that represents companies that use derivatives as a way to hedge, such as an airline seeking to manage its fuel costs.
"End-users, who did not contribute to the financial markets crisis, should not be subjected to the same regulatory structure as swap dealers and others who do not use derivatives to reduce legitimate business risks," the letter said. The letter marked the first time that groups such as the U.S. Chamber of Commerce and the Business Roundtable have endorsed the more-lenient House language on derivatives.
Lawmakers aren't expected to take up Lincoln's provision until next week, when they plan to deal with some of the thorniest remaining issues regarding new financial rules. Meanwhile, conferees spent the day Thursday debating, plodding through sections of the bill that would create a Financial Services Oversight Council and new government powers to wind down large, troubled financial firms.
The latter topic revived a months-old argument over whether the government should establish a fund, paid for by the financial industry, that could be tapped to liquidate failing firms. Republicans continued to label the idea as a "bailout fund," while Democrats reiterated that it would be used only to shut down seized companies.
House Democrats proposed reinstituting the $150 billion fund that they passed in December. Senate leaders, however, rejected it. Although the Senate bill originally proposed a $50 billion fund, it was dropped as part of a compromise with Republicans.
"We cannot undo one of the most critical pieces" of a deal that allowed the Senate bill to pass, Dodd said late Thursday.