Senate Swaps-Desk Plan Delayed as Lincoln Faces Election Battle

Senate Democrats are delaying action on a proposal to force banks including JPMorgan Chase & Co. and Goldman Sachs Group Inc. to wall off swaps trading while the plan’s sponsor deals with a re-election battle, lawmakers said.

Democrats haven’t filed an amendment to strip or change Senator Blanche Lincoln’s derivatives measure and movement is unlikely until after the Arkansas Democrat’s Senate primary on May 18, Senator Evan Bayh, an Indiana Democrat, said yesterday.

“Senator Lincoln’s got a primary next Tuesday, and so I think some of these things will have to wait until after that’s resolved,” Bayh said in a Bloomberg Television interview. Bayh said he is “confident” an amendment will be offered to change the language after the Arkansas vote.

The Senate is debating a financial-overhaul bill based on President Barack Obama’s plan to create a regulatory structure for the $615 trillion over-the-counter derivatives market, as well as an agency to protect consumers against predatory lending and a mechanism for unwinding failed companies whose collapse could threaten the economy. Debate on derivatives has been kept off the Senate floor as Democrats hone the measure.

Banks have lobbied against one of Lincoln’s proposals to deny swaps traders bank privileges such as access to the Federal Reserve’s discount window and Federal Deposit Insurance Corp. guarantees. FDIC Chairman Sheila Bair, Fed Chairman Ben S. Bernanke and the Obama administration have all expressed concern that the measure could force swaps trading into unregulated areas or overseas.

Republican Opposition

Senate Democrats including Kirsten Gillibrand of New York and Mark Warner of Virginia have discussed scaling back Lincoln’s proposal, which is unanimously opposed by Republicans.

“While several of them have privately admitted that they fear the wrath of the administration for speaking out publicly against the Lincoln-Dodd derivatives bill, their actions speak louder than their silence,” Senator Richard Shelby of Alabama, the top Republican on the Banking Committee, said yesterday. “They are apparently hard at work behind closed doors trying to make numerous, last-minute changes to this flawed bill.”

The Senate yesterday rejected a proposal by Senator Saxby Chambliss, a Georgia Republican, that would have stripped the Democrats’ derivatives language and substituted an alternative measure.

Senator Judd Gregg of New Hampshire said yesterday that Republicans were done trying to strip the language, even as he, Chambliss and Bob Corker of Tennessee filed an amendment drafted specifically to remove the provision.

“They’ve made their bed, let them sleep in it,” Gregg said to reporters yesterday after the vote on the Chambliss proposal.

Overstated Claims

Lincoln, the chairman of the Senate Agriculture Committee, defended her proposal on the Senate floor yesterday, saying claims that businesses would be driven overseas are overstated.

“The same tired claims and worn out, catch-all defenses of ‘unintended consequences’ or ‘driving business overseas’ have been used for decades as reasons to weaken financial reform efforts,” said Lincoln, noting that banks would still be able to trade swaps, a type of derivative, through subsidiaries.

Derivatives are contracts whose value is derived from stocks, bonds, loans, currencies and commodities, or linked to specific events such as changes in interest rates or weather.

“The language before the Senate misses the mark with it comes to appropriately regulating derivatives,” said Chambliss, the Agriculture Committee’s top Republican, before the vote on the alternative to Lincoln’s measure. The Democratic bill “will subject our American businesses to more risk,” he said.

The amendment was defeated in a 59-39 vote, with all Democrats opposing the measure.

The Republican proposal would have expanded the so-called end-user exemption for companies that use derivatives to hedge risk and removed the mandatory exchange trading requirement for standardized derivatives.

Lincoln has said the mandatory clearing and exchange trading requirements in her bill would bring transparency to a dark market and help with overall price discovery.

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