Senate Panel Approves Plan to Make Banks Spin Off Swaps Desk
By Phil Mattingly
The panel voted 13-8 to back a bill drafted by Committee Chairman Blanche Lincoln, an Arkansas Democrat. Senator Charles Grassley, an Iowa Republican, joined Democrats in approving the measure. The provision to make lenders separate swaps trading from commercial bank operations has been among the most contentious issues as lawmakers weigh new rules for Wall Street.
Grassley’s vote provided a rare bipartisan sign in the Senate debate over financial-industry regulations. Grassley said his vote today doesn’t mean he supports the broader legislation sponsored by Senate Banking Committee Chairman Christopher Dodd. Dodd, a Connecticut Democrat, is negotiating a bipartisan deal on the larger bill with Alabama Senator Richard Shelby, the banking panel’s top Republican. Lincoln’s derivatives measure would be merged into the broader bill, she told reporters today.
“The derivatives piece is significant, but that larger bill has a number of flaws that need to be resolved before I’d support it,” Grassley said in a statement after the vote.
Lawmakers are weighing derivatives oversight after bets made by American International Group Inc. brought the New York- based insurer to the brink of failure in 2008, forcing the U.S. government to pledge more than $182 billion in assistance.
Lincoln’s bill would bar companies that deal in swaps, a form of derivative, from bank privileges such as accessing the Federal Reserve’s discount lending window, emergency liquidity functions and the Federal Deposit Insurance Corp.’s deposit guarantee.
‘Small Fixes’
“This is no time for small fixes or tweaking around the edges,” she said in a statement before the vote. “This is the time for bold change and big decisions about the future of our country and the global financial system.”
Lawmakers from both parties have expressed concern about the spinoff proposal and Commodity Futures Trading Commission Chairman Gary Gensler has refused to support it, saying “the Federal Reserve and the Treasury has to think through these issues.”
“The Senate Agriculture Committee voted out a bipartisan bill that will bring derivatives trading out of the dark, provide strong oversight of market participants, and combat fraud, abuse and manipulation,” Treasury Secretary Timothy F. Geithner said in a statement.
The spinoff provision of Lincoln’s bill would cut banks’ ability to lend and could drive derivatives markets overseas, said Kenneth E. Bentsen of the Securities Industry and Financial Markets Association, a Washington trade group.
Antithetical
“At a time when borrowers are already finding it difficult to obtain credit, limiting financial institutions’ ability to lend seems antithetical to the goals of comprehensive reform legislation,” Bentsen, Sifma’s executive vice president for public policy and advocacy, wrote in an April 20 letter to Lincoln and Senator Saxby Chambliss of Georgia, the Agriculture Committee’s ranking Republican.
The bill would require mandatory clearing and exchange trading for standardized derivatives. Parties in over-the- counter trades would be required to put up increased capital.
Chambliss said Lincoln’s bill would put undue burden on institutions such as AgriBank FCB and CoBank ACB.
“All the sudden they are going to be treated like Goldman Sachs or JPMorgan,” Chambliss said.
Gensler, who has advocated requiring all derivative trades be cleared and traded on exchanges, said any additional exemptions would only open doors to more.
“Fundamentally the choice we’re dealing with is, every exemption from clearing makes it a little more likely that a taxpayer will have to stand behind a bailout,” Gensler said.
To contact the reporter on this story: Phil Mattingly in Washington at pmattingly@bloomberg.net.
Last Updated: April 21, 2010 14:47 EDT
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