Dodd Proposes Delaying Swaps Measure in Rules Bill (Update1)

May 18 (Bloomberg) -- Senate Banking Committee Chairman Christopher Dodd proposed shelving one of the most contentious provisions of the debate over Wall Street regulation, a rule that would force banks such as Goldman Sachs Group Inc. and JPMorgan Chase & Co. to move swaps trading to subsidiaries.

Dodd introduced a compromise amendment today that would delay the measure pending a one-year study of its effects by a new council of regulators. The panel could eliminate the rule if the study found it would “have a material adverse effect on the financial markets and economy.”

Senator Blanche Lincoln’s proposal to deny swaps traders access to the Federal Reserve’s discount lending window or Federal Deposit Insurance Corp. guarantees was part of a larger plan to strengthen derivatives oversight after unregulated bets by companies including American International Group Inc. were blamed for spurring the 2008 credit crisis. Lincoln’s plan has been a sticking point in the Senate, and Dodd’s compromise aims to make it more likely the broader bill will be approved and go to a House-Senate committee to iron out final differences.

“This takes the most pure form of the Lincoln language completely off the table,” Brian Gardner, senior vice president for Washington research and Keefe Bruyette & Woods said in a telephone interview.

Council of Regulators

The eight-member council of regulators to be created by Dodd’s broader overhaul bill would include the Treasury secretary, the Fed chairman and head of the FDIC. Fed Chairman Ben S. Bernanke, FDIC Chairman Sheila Bair and the Obama administration have already expressed opposition to Lincoln’s swaps language.

Lincoln, who is in Arkansas today for her Senate primary, said in a statement that she remains “fully committed to my provision and will fight efforts to weaken it.”

“I’m proud of the support my provision has received both inside and outside the Senate and will defend it should there be a debate on the Senate floor,” Lincoln said.

The Dodd amendment “allows some time to consider the potential negative consequences of the provision,” Talbott said.

Dodd today also led an effort to defeat an amendment that would have banned use of so-called naked credit defaults swaps. Senator Byron Dorgan, a North Dakota Democrat, offered the amendment, which eliminated the instruments that serve as a bet on the default of an asset in which the investor has no stake.

Derivatives are financial instruments based on the value of another security or benchmarks such as stock options. Losing bets on credit-default swaps, a type of derivative, pushed AIG to the brink of bankruptcy when the U.S. mortgage market collapsed in 2008.

Bank Opposition

Banks have lobbied against the Lincoln proposal, arguing that it would drive the derivatives market overseas and increase risk in the banking system by eliminating some of the industry’s primary hedging mechanisms. Bair, Bernanke and former Fed Chairman Paul Volcker, now an adviser to President Barack Obama, made similar criticisms in opposing the measure.

The five biggest dealers in the largely unregulated market -- JPMorgan, Citigroup Inc., Bank of America Corp., Morgan Stanley and Goldman Sachs -- earned $28 billion from their swaps trading operations last year, according to reports collected by the Federal Reserve and people familiar with the matter.

The proposal “would have actually increased the amount of risk in the economy. This is the opposite direction we need to be moving in,” said Scott Talbott, senior vice president for government affairs at the Financial Services Roundtable, a Washington-based financial industry trade group.

To contact the reporter on this story: Phil Mattingly in Washington at pmattingly@bloomberg.net.