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NJ Daily / FINANCE

Lincoln Pivots, Will Offer Tough Measure On Derivatives

April 14, 2010

Senate Agriculture Chairwoman Blanche Lincoln for months appeared to be crafting a bipartisan derivatives bill designed to please business interests much more than legislation from Senate Banking Chairman Christopher Dodd or language contained in a House-passed measure.

But Lincoln on Tuesday announced that she is switching course and offering up a tougher bill than has been proposed. Republicans cried foul over claims that White House pressure forced the Arkansas Democrat to derail bipartisan negotiations in a political effort to get tough on Wall Street banks that dominates the multitrillion-dollar over-the-counter market.

In a statement, Lincoln did not comment on the charge by Agriculture ranking member Saxby Chambliss that Treasury Secretary Geithner and Commodity Futures Trading Commission Chairman Gary Gensler prevented her from getting a bipartisan deal. In a statement, Chambliss said the administration had "forced politics in the pathway of meaningful financial regulatory reform."

 

Instead, she offered up tough talk that was out of the playbook of populists like Sens. Byron Dorgan, D-N.D., and Maria Cantwell, D-Wash., who have been pressing Lincoln to get tough on the industry, where the nation's five biggest banks control 97 percent of the trading done within their field, according to the Office of the Comptroller of the Currency.

"Proposals that I have seen from the administration have not gone far enough to prevent bailouts of 'too-big-to-fail institutions' and could contain loopholes," Lincoln said. "If we pass reform, it needs to be real reform. My proposal will go further than any other congressional or administration proposal to prevent future bailouts."

The switch is likely to please progressives, the same base that has become so infuriated with her positions on health care and union organizing that they have backed Arkansas Lt. Gov. Bill Halter as a challenger in the state's May 18 Democratic primary. Lincoln is set to release her discussion draft Thursday.

Sen. Tom Harkin, D-Iowa, praised Lincoln after emerging from a meeting with her and other Democrats on the Senate Agriculture Committee. "She is on the right track. She has done great work. She has a good, strong bill." Harkin was the chairman of the Agriculture panel before he took over the Health, Education, Labor and Pensions Committee and paved the way for Lincoln to assume the Agriculture gavel. He had earlier introduced a tough bill that would have required exchange trading of all derivatives in the OTC market, where transactions are conducted privately between two parties with very little oversight. Other Agriculture panel Democrats seconded the praise. Sen. Kent Conrad, D-N.D., said "This would be a major advance in regulating systemic risk."

And Sen. Sherrod Brown, D-Ohio, added, "I think we made a lot of progress. I like the way it is going."

Meanwhile, business interests -- the same ones she has studiously courted in a bid to keep power in an increasingly red state -- are likely to be disappointed. Only three weeks ago, Lincoln lauded the U.S. Chamber of Commerce, which has been leading the charge against Democratic attempts to regulate the market, for its role. "In the importance of pragmatic regulatory reform, I think the Chamber of Commerce really gets it," Lincoln said on March 24. "I don't believe in over-regulating."

The changes proposed by Lincoln include forcing banks to spin off their swap desks, a provision sure to be fought by the industry as the profits from such desks are enormous. Banks recorded $22.6 billion in revenues last year. According to aides, the bill also would bring foreign exchange swaps under the regulation; prohibit major swap dealers from receiving federal aid during a crisis; require dealers to have a fiduciary duty to local and state governments, pension plans and endowments; and allow regulators to take action against dealers if they knowingly engage in a transaction with another party to defraud investors.

The draft also would require mandatory exchange trading provisions similar to the House bill, requiring a swap to trade on a regulated exchange if it is deemed required to clear by the CFTC. Some commercial firms are exempted from exchange trading but not from real-time reporting for those trades.

Lincoln included language proposed by Gensler that would permit only commercial firms that use derivatives to hedge against risk from receiving an exemption from clearing, and prohibit all financial firms from receiving such a pass, according to an aide. Gensler estimates that only 9 percent of the trades would be eligible for an exemption under such a proposal.

In a letter to Cantwell and others, Lincoln wrote that her bill would be "surgical in its scope" and that "only commercial firms which are solely hedging their own commercial risks should be able to use some limited exemption."

Cantwell, who has been especially critical of the House-passed bill, especially a provision that would narrow the definition of who would be considered as a major swap dealer, sang Lincoln's praises.

"As the daughter of a farmer, she knows the difference between farmers legitimately hedging and Wall Street speculators cooking up toxic assets. It looks to me as though Sen. Lincoln is proposing a real stare-down of Wall Street." The Lincoln bill will be folded into a Dodd's measure to revamp the nation's financial regulatory system.

Dodd assigned Sens. Jack Reed, D-R.I., and Judd Gregg, R-N.H., on his panel to try and work out a compromise on the derivatives issue.

But the two have not been able to agree on how extensive exemptions for clearing should be provided to end-users, and if all trades should be placed on exchanges so the public can see the buy and sell prices.

"We have to touch on the issue here of mandated exchange treatment of derivatives, but that can be resolved, I hope. As a very practical matter, it's not a partisan question. It's simply a question of how you do it best. That's the approach we should take," Gregg said Tuesday in a floor speech.

A White House official said via e-mail that President Obama "remains hopeful that Republicans in Congress will join us in pushing for a strong bill."

In a statement, Halter criticized Lincoln for not being tough enough on Wall Street, bringing up her support for the Troubled Asset Relief Program in 2008 during the height of the banking crisis. Obama voted for TARP as a senator from Illinois.

Halter said Dodd's bill "should be seen as a floor, not a ceiling, and Sen. Lincoln should stop trying to undermine it on behalf of her corporate and big bank friends. And Sen. Lincoln should quit saying one thing to Arkansans when it comes to financial responsibility and doing another thing in Washington."

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