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Senate Derivatives Bill Faces Battle on Bank Spinoff Provision

U.S. Senator C. Saxby Chambliss
A file photo shows U.S. Senator C. Saxby Chambliss, speaking during a session of the World Economic Forum in Davos. Photographer: Daniel Acker/Bloomberg

The U.S. Senate is poised to consider a proposal that would fundamentally change the operations of commercial banks such as Goldman Sachs Group Inc.. and JPMorgan Chase & Co.

Under one part of a derivatives bill approved yesterday by the Senate Agriculture Committee, banks would have to spin off their swaps trading desks, which have generated billions of dollars in profits.

The proposal, strongly opposed by the financial industry, remains far from enactment. It faces objections from members of both parties and even the Obama administration, according to Senator Saxby Chambliss of Georgia, the top Republican on the Agriculture panel.

“The administration is opposed to it and I think for the right reasons,” Chambliss told reporters yesterday.

The bill’s author, Agriculture Committee Chairman Blanche Lincoln, called the spinoff provision “the most powerful of all the reforms” aimed at stronger oversight of the derivatives market.

Industry officials have said the proposal would have unintended consequences. It would force trading to overseas markets and restrict lending at a time when borrowers are already finding it difficult to obtain credit, Kenneth E. Bentsen, executive vice president for public policy and advocacy at the Securities Industry and Financial Markets Association, said in a letter this week to Lincoln and Chambliss.

“This section might actually require American banking organizations, including nonbank affiliates, to get out of the swap dealer business entirely,” Bentsen wrote.

On the Table

For most of the Congressional debate about how to regulate derivatives, the spinoff proposal was not even on the table. It emerged last week as part of the bill crafted by Lincoln, an Arkansas Democrat.

“For a handful of the largest banks that would be a major problem -- of late the rates derivatives business in particular has been nothing short of an astonishing money maker,” said Raj Date, a former Deutsche Bank AG executive who is now executive director for Cambridge Winter Inc.’s center for financial institutions policy.

U.S. commercial banks held derivatives with a notional value of $212.8 trillion in the fourth quarter, according to the Office of the Comptroller of the Currency.

The five U.S. banks with the biggest holdings of derivatives -- a group that includes include JPMorgan Chase & Co., Bank of America Corp. and Goldman Sachs -- hold $206.2 trillion, or 97 percent, of that total, the OCC said.


Banks will likely flood Capitol Hill with lobbyists in an effort to get the provision stripped, Date said. “It’s one of these issues where it matters a lot to five firms,” Date said.

Lincoln’s spinoff provision would bar companies that deal in swaps from bank privileges such as accessing the Federal Reserve’s discount lending window emergency liquidity function and the Federal Deposit Insurance Corp.’s deposit guarantee.

The nation’s largest commercial banks are the most dominant in the market precisely because they have such access, according to Brian Gardner, an analyst at Keefe, Bruyette & Woods in Arlington, Virginia, who was staff director on the House Financial Services Committee for former Louisiana congressman Richard Baker.

“There’s a reason why commercial banks have been leaders in derivatives dealing for the better part of 15-20 years, because their balance sheets so dictated it,” Gardner said.

Samuel Robinson, a spokesman for Goldman Sachs and Joe Evangelisti, a spokesman for JPMorgan Chase, declined to comment on the provision.

Strip the Provision

Democrats on Lincoln’s own committee filed amendments to strip the provision from the bill during the committee’s consideration and may try again when it hits the Senate floor.

“I think we all want to make sure we don’t throw the baby out with the bathwater, that we tackle what has been clearly outrageous behavior that has hurt Americans at the same time that we allow a system to work as it should be working,” Senator Debbie Stabenow, a Michigan Democrat on the committee, said yesterday.

Michael Barr, the assistant Treasury secretary for financial institutions, wouldn’t comment on the provision when he was asked about it by reporters. Gary Gensler, the chairman of the Commodity Futures Trading Commission, wouldn’t support the provision, saying only that “the Federal Reserve and the Treasury has to think through these issues.”

Going Further

The spinoff proposal is just one part of the Agriculture bill, which goes further than others introduced in the House and the Senate by imposing a fiduciary duty on banks entering into interest-rate swaps with cities, counties and other municipal issuers -- a nod to the billions of dollars in unexpected interest bills and fees that hit U.S. communities when derivatives meant to protect them from rising borrowing costs began to unravel.

In the wake of the Securities and Exchange Commission’s suit against Goldman Sachs and the persistent bashing of Wall Street by lawmakers, the pressure on banks is unlikely to ease any time soon.

“It’s not going to get better over the next couple of weeks,” Gardner said. “The only thing that can help Wall Street’s reputation and their standing with the public and their political standing is time and they don’t have time right now.”

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