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Blanche Lincoln's derivatives proposal passes Ag Committee with Republican support

Blanche Lincoln's extremely aggressive derivatives proposal passed out of the Senate Agriculture Committee today. The expectation was that it would win on a party-line vote. And it did -- almost. But Iowa Republican Chuck Grassley surprised observers by joining the Democrats to vote for the legislation.

To get a sense of why this was a surprise, recall that Judd Gregg had scorned the proposal as "about as far left as you could get on the issue of derivatives." That Grassley, who's up for reelection in 2010, decided to cross over for this is the best evidence I've yet seen that financial regulation is going to pass.

By Ezra Klein  |  April 21, 2010; 3:25 PM ET
Categories:  Financial Regulation  
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Good for Grassley. Yes, I expect FinReg will pass, and will pass with a few Republican votes, in the traditional mode of quasi-bipartisan legislation. It will incorporate ideas from both sides of the aisle, will have things that displease both sides (but especially the Republicans, since Obama gets the credit, and there are campaigns to run), but it will pass. Probably with some anti-bailout language.

Posted by: Kevin_Willis | April 21, 2010 3:37 PM | Report abuse

Of course it will pass. The question is, will it be strong enough to do the job that needs doing?

I'd like to see Glass-Stegal come back, but I guess that isn't going to happen.

Posted by: nisleib | April 21, 2010 3:45 PM | Report abuse

Another story on this said:

"The draft of her bill provides a relatively wide exception for agricultural and other commercial companies but still requires them to raise money for derivative trades.

"Some officials view the legislation as too friendly to the commercial firms who have sophisticated derivatives trading desks, while overly punishing financial firms. If allowed to stand, they have said, the market would simply shift its activities away from Wall Street to the commercial firms, critics argue, but become no less dangerous to the financial system."

Is this a real concern? If so, why the loophole?

Posted by: ADCWonk | April 21, 2010 4:00 PM | Report abuse

My concern is that Grassley will vote for this agressive but simple derivatives legislation but that if it's merged with the whole financial bill he'll find some reason to oppose the package of legislation (SOCIALISM!). Is it possible to have this legislation on the floor separate from the rest of the bill? Maybe it'd be better to have several bills come up for votes. Maybe it would force individual Republicans to peel off to vote for pieces that they just can't oppose, or maybe they'd all vote against everything but have to do it a million times. "Voted against reforming Wall Street 30 times!"

Do we know how unified the Dems are? Do we only need to peel of a Republican to get this all done, or are we going to have a repeat of last time when we had to placate the divas of the Democratic party?

Posted by: MosBen | April 21, 2010 4:26 PM | Report abuse


I agree. If you have different rules for different players, the action done previously by the player you aggressively regulate will shift towards being done by the player you don't aggressively regulate.

This is how the shadow banking system arose.

Does anyone know how this affects interest rate swap trading at banks? For example, banks have interest rate swap positions on their balance sheets (well, actually off balance sheet) to manage their interest rate risk.

Think of a stylized bank with two assets and a liability - a $90 mortgage at 5%, $10 in fed funds sold and a $100 savings account at 2%. Let's say market rates roughly in parallel by 200bps so that mortgages are now 8% and the savings account needs to pay 4% to keep the depositor. However, the bank can't yank away the 5% mortgage - it has to continue holding that low yielding mortgage. Under this situation, net interest income falls from 3% to 1%, and not only is the bank not being compensated for risk, but it also might not be covering its overhead. Prior to this shift, a bank might put a $100 interest rate swap on, a payfix swap, on which it pays another party 1.25% and it receives 1% floating. The bank then uses that 1% to pay off the savings account holder. If interest rates rise 200bps, the bank pays 1.25% still, but receives 3% on the swap trade, which allows it to keep its payment unchanged and its net interest income unchanged.

Without the ability to use dervivatives, it becomes much more difficult for banks to hedge their interest rate risk, which could lead banks to fail (again).

However, bank balance sheets are very complicated, and there is a lot of discretion in making these trades. In theory, a bank could over/under hedge to take a bet on interest rate movements, rather than just to hedge. Or if the bank is allowed to use credit default swaps to hedge out credit risk, the bank might over/under hedge to take a net long/short position on credit.

Posted by: justin84 | April 21, 2010 6:18 PM | Report abuse

This may have been addressed in an earlier post, Ezra... so forgive me if I just missed it, but:

Why is Financial Reform regulation coming out of the Agriculture Committee?

Posted by: lukegmarshall | April 21, 2010 6:38 PM | Report abuse


The only thing I can think of is that commodity futures are financial products...

Posted by: justin84 | April 21, 2010 6:58 PM | Report abuse

Seems like a big deal.

I really admire Blanche Lincoln to have guts to put this in the first place. Of all the FinReg items, this is the one of great value. No doubt this is one heck of a way to bring in line these 'big banks' on Wall Street.

Lincoln is able to get the win with GOP, that portends well...

Posted by: umesh409 | April 21, 2010 7:11 PM | Report abuse

"I really admire Blanche Lincoln to have guts to put this in the first place."

Uh huh. Send your thank you card to Bill Halter, whose credible primary challenge has inspired Sen. Lincoln to do a reasonable impersonation of a real Democrat.

This bill is perhaps the best evidence I have ever seen in support of the value of primary challeges from the left to the ConservaDems.

Posted by: Patrick_M | April 21, 2010 7:42 PM | Report abuse

Patrick-M: I am not denying the value of primary challenge. I am not politically illiterate to know how difficult politically this season has been to Sen. Lincoln. Besides, as far as I remember, I have had never any significant recollection of Lincoln as the 'profile in courage'.

But the point is so many Dem Senators are in the same position but we still do not see even minimum proactive initiative from those folks.

If Sen. Lincoln is able to pull off this in the final law; all of her lackluster career can be ignored for this one single victory.

Because what she is talking here is that earth shattering. We are never used to have our Senators taking sides of 'we common folks' over Bankers and coming that from a generally low profile / mildly clueless Senator like Lincoln is a surprise.

Posted by: umesh409 | April 21, 2010 11:22 PM | Report abuse


I am happy about the derivatives bill moving out of committee (even though it has some pretty big carve-outs, and some weird unrelated stuff mixed in). My point is simply that the only reason it happened at all is Lincoln's need to find a big "something" to show disenchanted Democratic base voters in Arkansas who would otherwise see no reason not to vote for Halter this year.

Also, there is an unsung hero in this proposal: Sen. Maria Cantwell of Washington State. This is actually Cantwell's proposal, and Cantwell has been agressively advocating for derivatives reform since 2009. She just needed someone on the Banking or Agriculture Committees to take the ball and run with it. Lincoln, badly in need of a progressive ball with which to run for her own political future, decided this was her opportunity.

Also I would not read too many portends into Grassley's vote. It is probably a safe assumption that he and Lincoln trade favors. Grassley is already indicating that he may abandon the regulations later on (he of course signed the letter opposing Dodd's bill, with which this reform will have to be merged).

For me, bringing forth this useful Cantwell legislation does not really redeem Lincoln from fighting EPA regulation of greenhouse gases (and any meaningful climate legislation), her no vote on the health care reconciliation side car, her joining in the Republican filibuster of Craig Becker, and the countless other anti-progressive positions she has taken during her 12 years in the Senate.

I hope Halter wins the primary. It will be tough for either one of them in November, but despite the welcome derivatives language, in my opinion Lincoln's overall voting record is unworthy of her nomination for a third term by Arkansas Dems.

Posted by: Patrick_M | April 22, 2010 1:09 AM | Report abuse

In case anyone wants to know more about the REAL "Profile In Courage" behind derivatives reform, here is a nice summary of Senator Cantwell's tireless effort that produced today's vote in the Senate Ag Committee:

Posted by: Patrick_M | April 22, 2010 1:33 AM | Report abuse

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