A group of U.S. House Democrats is strategizing to strip the most contentious derivatives language from legislation to overhaul the financial-regulatory system.
Representative Michael McMahon, a New York Democrat who played a role in shaping the House derivatives language passed last year, said he will work to remove a provision in the Senate legislation that would force commercial banks such as Goldman Sachs Group Inc. and JPMorgan Chase & Co. to move their swaps- trading operations to subsidiaries.
“My position is that it should come out now,” McMahon, one of the lead derivatives negotiators for the self-described “moderate, pro-growth” New Democrat Coalition, said in a telephone interview yesterday. “The House bill is based on principles on how to reduce risk and make the system more transparent, it’s not based on wiping out the system or destroying the system and that’s what the provision does.”
Senator Christopher Dodd of Connecticut and Representative Barney Frank of Massachusetts, the Democrats shepherding the legislation through Congress, said last week they expect to have a final financial regulation bill signed into law before the U.S. July 4 holiday.
To do that they must resolve differences between the two bills without alienating enough lawmakers to threaten final approval. Among the major differences to be resolved is the plan for tightening regulation of derivatives, financial instruments based on the value of another security or benchmarks such as stock options. Bets by banks and other financial companies on derivatives accelerated the global credit crisis in 2008.
Crafted by Lincoln
The derivatives section of the Senate bill was crafted by Senator Blanche Lincoln, an Arkansas Democrat. The rule requiring banks to push out their swaps desks, which Lincoln said was necessary to rein in banks’ risk-taking, has drawn the most opposition. Lawmakers from both parties have sought to remove it, as have regulators and banking-industry lobbyists.
The House legislation, passed in December, doesn’t include the push-out provision and has an expanded exemption for trades designed by banks to help commercial users hedge risk. The Senate bill has a tighter exemption, requiring that standardized trades be cleared through a third-party clearinghouse and traded on a regulated exchange or similar electronic system.
Representative Gary Ackerman, a New York Democrat on the House Financial Services Committee, had his staff circulate a draft letter yesterday to House members seeking their opposition to the Senate’s swaps-desk rule.
“We are deeply concerned by the very real possibility that, as a result of the Senate derivatives provision, America’s largest financial institutions will move their $600 trillion derivatives businesses overseas, at the expense of both New York’s and the United States’ economy,” said the letter from Ackerman, addressed to House Speaker Nancy Pelosi, a California Democrat, and Minority Leader John Boehner, an Ohio Republican.
Federal Reserve Chairman Ben S. Bernanke, Federal Deposit Insurance Corp. Chairman Sheila Bair and former Fed chairman Paul Volcker, now an adviser to the Obama administration, are all on record against the Lincoln measure.
The fight to remove the provision won’t be an easy one for the House Democrats, as their colleagues in the Senate can verify. Lincoln, who is likely to be on the conference panel, has fended off several challenges on the Senate floor and has vowed to keep fighting for the proposal. She referenced it repeatedly in her primary battle with Arkansas Lieutenant Governor Bill Halter and is now facing a June 8 runoff with Halter after failing to clear the 50 percent needed to win the nomination outright in the May 18 primary.
The banking industry’s largest trade groups, including the Securities Industry and Financial Markets Association, have targeted the swaps-desk provision in the House-Senate talks.
“Requiring banks to push out their derivatives businesses and limiting their ability to hedge their own risk exposures would not only deplete institutions of much needed capital, it will ultimately hurt consumers through higher mortgage and credit costs,” Timothy Ryan, SIFMA’s president, said in a statement the night the Senate bill passed.
That same night, Lincoln’s campaign manager, Steve Patterson, blasted a victory e-mail to supporters. “Her opponents and the pundits said she couldn’t do it, that it was a stunt, that it would never pass,” Patterson wrote, “She proved them flat wrong.”
McMahon said he wants the measure deleted from the bill and won’t support a compromise like the one floated by Dodd in the Senate last week. The Dodd plan would have subjected the rule to a one-year study before regulators decide whether it should be adopted.
The swaps-desk rule has survived so far because of campaign rhetoric, McMahon said.
“There are some places in the country where it’s good local politics to push a provision like that or to take an antagonistic view towards Wall Street, but I think that is short-sighted and ultimately will hurt the American economy,” said McMahon, a New Democrat whose constituents in Staten Island and Brooklyn include many Wall Street workers.