Blanche Lincoln's derivatives proposal 'sent shudders through Wall Street'
Blanche Lincoln is really preparing to lay the smack down on the derivatives market.
The proposal by Sen. Blanche Lincoln (D-Ark.), who chairs the Agriculture Committee, sent shudders through Wall Street. For nearly two decades, five U.S. banks -- J.P. Morgan Chase, Goldman Sachs, Morgan Stanley, Bank of America and Citigroup -- have acted as middlemen, allowing commercial firms and financial speculators to trade vital goods such as oil, natural gas and cotton, as well as contracts called derivatives. These are essentially side bets on which way such commodities, stocks and other assets will move.
Under Lincoln's plan, as described by her aides, the companies would have to spin off that activity if they wanted to remain banks.
The proposal is tougher than what the administration has sought. The Senate bill, which largely reflects administration thinking, stops short of an outright ban on derivatives trading by the Wall Street companies. Lincoln's proposal, which her staff said is due out this week, could be added to that legislation.
To my knowledge, that's the first time anything proposed by a relevant legislator has "sent shudders through Wall Street." So Lincoln gets extra credit for that. If the financial sector's behavior doesn't lead to legislation that makes it shudder a bit, something is terribly, terribly wrong.
But ask about the chances that Lincoln's package will end up in the final bill and you'll hear that it's doomed, laughable, a transparent effort to protect against a primary challenge back in Arkansas (the relevance of this last objection is a little unclear). That may all be so. But I don't think people sufficiently appreciate how much Lincoln is changing the politics of financial-regulation reform.
To view the politics of Lincoln's hard advocacy for an aggressive derivatives package more clearly, imagine that Max Baucus or Kent Conrad had made a strong public option the core of their health-care reform strategy. Like Baucus and Conrad, Lincoln chairs a relevant committee (the Senate Agricultural Committee, for better or worse, governs derivatives) and has a long-standing reputation as a conservative Democrat. Her position makes it a lot harder for other conservative Democrats to hold firm against a serious regulation of derivatives. With Lincoln's name on the plan, you can't say that it's an unrealistic pipe dream from the party's liberal wing.
By making a strong bill more credible, Lincoln's proposal might make a bill less likely. Democrats will have a harder time conceding on the issue and Wall Street money will flood in to make sure that Republicans hold the line. Given that this bill needs 60 to pass, that makes the math a lot tougher. Wall Street might shudder. But it's not yet clear that it needs to be scared.
Photo credit: Brendan Hoffman/Bloomberg
April 15, 2010; 3:50 PM ET
Categories: Financial Regulation
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