Democrats pressure Lincoln to change derivatives plan in reform measure
Thursday, June 24, 2010
Democratic leaders pressured Sen. Blanche Lincoln (D-Ark.) Wednesday to scale back a proposal that would force big banks to spin off their derivatives businesses, highlighting a conflict that has the potential to crack Democratic support behind the massive regulatory reform bill as it nears final passage.
At the meeting among key Democrats in the office of House Speaker Nancy Pelosi (Calif.), Lincoln resisted calls for compromise, a Democratic aide briefed on the conversation said. Her refusal to strike a deal is dividing liberal Democrats supporting the proposal and moderates who want it removed. The issue is expected to be in the spotlight Thursday as the House and Senate seek to reconcile their versions of the bill.
With razor-thin congressional support for the overall legislation, Lincoln's amendment has emerged as a particularly delicate issue for Democrats and a focal point between two, sharply divergent views within the party over how to overhaul the nation's financial regulations.
The dominant faction, led by Treasury Secretary Timothy F. Geithner, has pushed for keeping the financial system more or less intact while imposing more oversight and higher levels of capital to ensure that large, systemically important banks have enough cash to buffer themselves against future market crashes.
The other contingent thinks the system and federal regulators failed the country and is calling for more dramatic measures. Partly because those in this camp have been on the losing side of an array of regulatory reform debates, they are rallying behind Lincoln's provision. "If a system is as badly broken as this one, it needs more radical changes," said Simon Johnson, an MIT economics professor who has advocated for breaking up big banks.
As crafted, the bill calls for almost no structural changes to Wall Street. Big banks will continue to be big. Financiers will be allowed to engineer complex financial securities. And a small number of firms will continue to hold the vast majority of the assets of the financial system.
Lincoln's provision stands out as a notable exception.
Lincoln deflected questions late Wednesday about whether she would yield on her derivatives provision. "We're listening to what people's concerns are," she said. "I hope others will be just as anxious as I am to make sure that we don't see another financial crisis."
Earlier in the day, her spokeswoman, Courtney Rowe, was upbeat, saying, "So far all indications are that things are looking very promising for this provision."
Lincoln has agreed to make a few minor changes in her amendment. One would allow banks to use derivatives for "plain-vanilla" activities, such as offering homebuyers the ability to lock in mortgage interest rates, Democratic aides said. But banks would still have to separate the rest of their derivatives business from their banking operations and fund them with a separate pool of capital -- a potentially expensive action that has Wall Street worried.
The talks are proceeding delicately, given the intraparty nature of the debate. While administration officials have made no secret on Capitol Hill of their distaste for the provision, they have carefully avoided speaking publicly about their opposition to the measure. The Treasury Department declined to comment for this article.
Administration officials are concerned that spinning off the derivatives business of Wall Street firms could encourage these divisions to move overseas or into hard-to-regulate arenas, according to lawmakers and aides who have discussed the matter with the Treasury. Administration officials add that if Lincoln's proposal becomes law, banks would have to raise extra capital. That could constrict the amount of credit available for economic activities such as lending or investing.
A group of 69 moderates in the House, known as the New Democrat Coalition, has worked against the provision, raising the prospect that they could withhold their support if the measure is included in the final bill.
But the amendment's supporters argue that a bank enjoying privileges such as government insurance on deposits should not have a risky derivatives-trading business at the same time. They note that Lincoln's proposal would affect only a few large banks, including Goldman Sachs, J.P. Morgan, Morgan Stanley, Citigroup and Bank of America.
In a letter on Wednesday to their party's leaders, several Democrats -- including Rep. Rosa DeLauro (Conn.), Rep. Bart Stupak (Mich.), and Rep. Jackie Speier (Calif.) -- renewed their call for Lincoln's amendment.
"The Senate bill includes important provisions that remove the ongoing Federal subsidy to the derivatives businesses of the five large banks that dominate this market," the letter said. "This language will help ensure that taxpayers are not supporting this risky activity with deposit insurance or other benefits."