US DEMOCRATS have agreed a forceful stance on derivatives that could make banks spin off trading desks but some aides from both parties say legislation will stop short of an outright ban.
The senate financial regulation bill faced its first procedural vote last night, paving the way in theory for a floor debate and final passage. But in the absence of a bipartisan deal, all 41 Republican senators are expected to vote against the motion and delay the bill.
“I don’t believe we’ll have a deal today,’’ Richard Shelby, the senior Republican on the committee, told ABC. “I believe we’re going to get a good bill but that’s what we want: we want a strong bill.’’
In a step forward on the Democratic side, Blanche Lincoln, chairwoman of the the senate agriculture committee, and Chris Dodd, chairman of the banking committee, agreed to take a tough line on derivatives.
The agreement incorporates language in Ms Lincoln’s own bill that would force deposit-taking banks to spin off their derivatives operations with the argument that the financial instruments are too inherently risky to be traded by companies benefiting from government guarantees.
However, aides involved in the legislative drafting said changes could be made that allow the activity to continue. One argument against the approach proposed by Ms Lincoln is that the trading will be forced into more shadowy parts of the financial system, amplifying the risks involved.
The problem for the industry is that the bill is being debated just as the Securities and Exchange Commission’s (SEC) fraud charges against Goldman Sachs have encouraged politicians to take a tough line. “Nobody wants to be portrayed as weakening the bill,” said one person involved in the legislation.
Yesterday, Goldman Sachs and its chief executive Lloyd Blankfein were hit with a shareholder lawsuit claiming they hid key details about a risky transaction that led the SEC to file charges and caused the stock to plummet.
Changes could still be made to get Republican support. Mr Dodd needs at least one Republican to agree not to block the legislation to get him to the 60 votes necessary for passage.
In addition to derivatives, the debate is over consumer protection rules where some senators are pushing for a change to the “pre-emption” standards to prevent individual states from taking a varied approach to enforcing the rules on banks.
Large banks that operate across state lines have long argued they face an intolerable burden if they are subject to different standards by 50 state regulators.
They have all but given up the fight against a strong federal bureau that would take action against the abusive mis-selling of credit.
Republicans and Democrats are yet to come to a final deal on the resolution authority used to wind up a failing financial institution. – (Copyright The Financial Times Limited 2010)
