• "If you want to be a bank, then you need to be a bank"
The high-profile government investigation of Goldman Sachs (GS) seems to have defanged Wall Street's once-formidable lobbyists, at least temporarily. On Apr. 21, the Obama Administration moved forward in its campaign to tighten the rules governing the financial industry when a Republican senator, Charles Grassley of Iowa, broke party ranks to vote with Democrats to impose strict limits on derivatives trading.
In a 13-8 tally, the Senate Agriculture Committee sent the derivatives measure to the floor. It would require, among other things, that Wall Street traders use clearinghouses to process deals and collect collateral to back up trades. It will be folded into a larger financial reform bill that was expected to be debated within days. Risky derivatives trading is what the Securities & Exchange Commission's lawsuit against Goldman is all about.
Grassley's support of a broader bill isn't a sure thing, but his defection may mean more GOP support for the White House, and the 60 votes needed to approve Obama's proposal. The Goldman news helps Obama, and as Bloomberg Businessweek went to press, he was set to turn up the volume on financial reform on in Apr. 22 speech in New York.
Wall Street may not be able to halt reform as it has in the past. "Three years ago, AIG would have been up here lobbying for some sort of exemption in this derivatives proposal," says Michael Greenberger, a former official at the Commodity Futures Trading Commission and now a professor at the University of Maryland School of Law.
Wall Street has far fewer friends in Washington these days among pro-business Democrats and Republicans. Senator Blanche Lincoln, the moderate Arkansas Democrat who heads the agriculture panel and faces a tough Democratic primary this summer, sponsored the derivatives measure, which goes beyond what the White House sought. Much to the horror of bank lobbyists, Lincoln's plan would force commercial banks to spin off their derivatives trading desks or lose Federal Deposit Insurance Corp. protection on their deposits. Goldman, JPMorgan Chase (JPM), Bank of America (BAC), and other banks where derivatives are a major profit center would not be able to tap cheap financing available through the Federal Reserve. (Her proposal would let Treasury exempt foreign currency derivative trading.) "If you want to be a bank, then you need to be a bank," Lincoln said at a Washington news conference before the vote.
The bottom line: A GOP senator's support for a tough derivatives bill suggests President Obama may have momentum for broader regulation overhaul.