Senate Dems decide Blanche Lincoln went too far in regulating derivatives, weaken her bill

by: Chris Bowers

Wed Apr 21, 2010 at 14:01

Correction: It appears that Gillibrand's amendment on proprietary trading was notincorporated into the manager's mark, but her exemption for foreign exchange derivatives was.


Yeah, you read that headline correctly.  Senate Democrats have just weakened Blanche Lincoln's derivatives language within the overall Wall Street reform legislative package.

As chair of the Agriculture Committee, Lincoln had jurisdiction over the derivatives language aspect of the bill (I know it seems weird, but that is the committee with jurisdiction).  In terms of the sheer money involved, derivatives are practically the entire bill.  In 2008, the derivatives market was worth $81 trillion, which is about 30-40% larger than the GDP of the entire world.

Lincoln's language on derivatives will be combined with the rest of the bill in the manager's amendment once it is on the floor.  Unfortunately, it seems that Senate Democrats, led in this instance by Kirsten Gillibrand (NY), Bob Casey (PA) and Debbie Stabenow (MI), thought that Blanche Lincoln, that paragon of liberalism, went too far.  So, several exceptions to Lincoln's derivatives language were inserted during the committee mark-up process:

Subscription-only Congress Daily discussed the Gillibrand exemptions last night.  While this article is written in the conditional, and Gillibrand did not actually offer the amendment, she still succeeded in forcing some these changes into the bill:

Senate Agriculture Chairwoman Blanche Lincoln's stance against Wall Street reflected in her derivatives bill has drawn the protest of Sen. Kirsten Gillibrand, D-N.Y., whose state is home to the large banks that dominate the over-the-counter trading market. Gillibrand is attempting to scale back a provision in Lincoln's bill, which will be marked up today, requiring large commercial banks to spin off their highly profitable swaps desk. The Lincoln measure will be merged with Senate Banking Chairman Christopher Dodd's regulatory revamp package, which is likely to be on the floor next week.

Gillibrand has sponsored an amendment that would put up roadblocks to Lincoln's language prohibiting banks from receiving FDIC deposit insurance or accessing the Federal Reserve discount window if they trade in swaps or securities-based swaps. The bill would effectively force JPMorgan Chase, Goldman Sachs, Citigroup, Morgan Stanley and Bank of America to spin off their swaps desks, which bring in billions of dollars in revenue annually. All except Bank of America are headquartered in New York, though its Merrill Lynch investment banking subsidiary is housed in the city.

The amendment would require the Commodity Futures Trading Commission to undertake a study on banks that had swap operations as to whether they pose a risk to the FDIC system and the impact of barring them from offering such services. The CFTC would then propose rules based on the findings, which would have to be approved on a two-third vote by a panel representing the Fed, Treasury, the SEC, the FDIC and the Office of the Comptroller of the Currency.

And it wasn't just Gillibrand.  Bob Casey secured permanent exemptions for pension funds that deal in derivatives.  Debbie Stabenow of Michigan pulled some corporate home-state pork by securing exemption for Ford Motor Finance and other highly leveraged financial subsidiaries of manufacturing and homebuilding firms.

When it comes to placating home-state interests, many Democratic Senators can be hard right-wingers.  That Gillibrand, Stabenow and Casey moved to the right of Blanche friggin' Lincoln, and successfully poked holes in her derivatives language, is a good example of this.

Chris Bowers :: Senate Dems decide Blanche Lincoln went too far in regulating derivatives, weaken her bill

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jurisdiction makes sense (4.00 / 2)
The futures markets in corn, soybeans etc. are hugely important to farmers and the ag sector.

Join the Iowa progressive community at Bleeding Heartland.

True (4.00 / 4)
It's the derivatives market that's crazy, not the Senate jurisdiction.

As Krugman said on Maddow's show last night, for all that "innovation", no one can point to a single one--other than ATMS--that actually does more good than harm to the larger society.  So if we went back to the days when agricultural futures were the dominant form of derivative, that would be a huge improvement.

"You know what they say -- those of us who fail history... doomed to repeat it in summer school." -- Buffy The Vampire Slayer, Season 6, Episode 3

[ Parent ]
Stablalizing Prices (4.00 / 1)
My understanding is airlines like to bet that jet fuel costs will go up, that way they can sell tickets in advance and make the same overall profit regardless of reasonable market fluctuations.  So there is a good reason for these products to exist, even outside of agg.

But putting these products on an open exchange hurts no one, other than Wall Street profit margins.  Some might even call it a "free market" solution.  And these complex, "innovative" derivatives serve no useful purpose to society that anyone can identify.

[ Parent ]
There is a difference (0.00 / 0)
between a market exhanged future and derivatives.  

A market exchanged future (eg oil) allows many businesses to hedge risks.  There is a perfectly valid reason for doing this.  Southwest, for example, always hedges against increases in the price of oil, and their success in this has in some quarters been the difference between being profitable and losing money.  Moreover, these futures are based on a basic commodity.  Trading them can get complex, but in the end the trade is reasonably straight forward.

The types of derivitaves that lead to the crisis are different in a number of ways:
1.  They are not necessarily standard. Many of the derivitives are unique to a particular package of debt.
2.  They are not simple.  They involve slicing a particular obligation into unique parts, and understanding them can be very complex.

I have seen instances where a derivative does make economic sense.  

The problem is that the accouting system simply can't accurately reflect the related risks that they create.  That is the fundemental problem.

What people don't seem to understand is that the real issues behind the crisis (the weaknesses in how appraisers value real estate, the problems in describing adequately complicated financial transations) aren't being addressed.  

Fundementally the systems being used for valuing assets  are inadequate.  

[ Parent ]
fladem is right (4.00 / 1)
I'm not sure when the jet fuel futures began being traded, but it's not an innovation.  An innovation would be another kind of derivative, involving a different set of calculations.  This is just another flavor of future.

"You know what they say -- those of us who fail history... doomed to repeat it in summer school." -- Buffy The Vampire Slayer, Season 6, Episode 3

[ Parent ]
add this to the list (4.00 / 3)
of reasons the DSCC won't get any money from me for a long time.

Join the Iowa progressive community at Bleeding Heartland.

In a federalist system like ours (0.00 / 0)
where Senators represent states before country and representatives represent districts before country, stuff like this happens.

Michigan representatives will sell the rest of the country down the river for the auto industry, New York, New Jersey and Connecticut (and I guess North Carolina now too), the banks, Nebraska and Connecticut, the insurance industry, corn-Iowa, fruit-Florida, California, oil-Texas, coal-Kentucky, West Virginia.

That's part of life...always been that way, so I'm not shocked. Still pretty surprised we got the bill out of Ag that we did.  

Eh (4.00 / 4)
Dems don't want real reform. Obama, Waxman, and dozens of other Dems have made it quite clear they're terrified of losing Wall Street support to the GOP. Which is to the say others party doesn't have go along with Gillibrand's gift to her state, but they want to.

[ Parent ]
Yeah (0.00 / 0)
some of us prefer not to be infinitely cynical.  

[ Parent ]
So Much For The Greatest Deliberative Body In The US Capitol Building Other Than The House of Representatives (4.00 / 1)
They are about as parochial as anyone you'd ever meet.  And they're more deliberitve about what to have for lunch than they are about legislation.

"You know what they say -- those of us who fail history... doomed to repeat it in summer school." -- Buffy The Vampire Slayer, Season 6, Episode 3

$%%^@@!!! (4.00 / 1)
Originally I was very disappointed with both the House bill and what it seemed we were getting from the Senate.  It was this derivatives piece that got my hopes up that the final bill would be worth supporting.

You don't need to break up the banks if you can seriously hurt their profit margin.  This had a shot at doing that.


But I assume (4.00 / 2)
the result will still be "strong enough" on derivatives to save Obama from having to make good on his veto promise?

[ Parent ]
lol (4.00 / 1)
You actually got me to laugh out loud on that one.  And I'm the pro Obama guy in these parts.

[ Parent ]
Ha (0.00 / 0)
Well there are few pro-Obama-ish people here, and while I don't often show it, I appreciate your presence.  

[ Parent ]
Let the gutting begin! (4.00 / 2)
Funny thing is, Gillibrand voted against TARP, citing lack of accountability--probably the one good vote she cast in the House.

But now she's Schumer Jr. and running statewide, so it's time to pony up. Whatever we do, though, we must keep supporting this fine fake progressive and not even consider supporting Jonathan Tasini, a real progressive.  

I know Tasini (0.00 / 0)
he's not a real progressive, he's an opportunist. I know him personally.  

[ Parent ]
Probably a corrupt bargain (4.00 / 1)
Lincoln could appear to have a backbone, with assurances that less electorally endangered Wall Street Senatorial Guardians would come to the rescue and eviscerate her proposal.

I am pissed off at my junior NY senator.

Exactly (4.00 / 4)
"Villain Rotation," as Glen Greenwald calls it.  They take turns playing the bad guy in order to pretend to be with us.  And the bad guys always seem to win.

[ Parent ]
Is this the time when Jonathan Tasini, Gillibrand's liberal primary challenger, finally gains some traction? (4.00 / 3)
Or will he continue to be ignored and marginalized?

His website is here, btw.


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