Senator Lincoln... Please Stick to Your Original Proposal, Don't Cave Now!!!     - J.M.H.

Senate's Lincoln Considers Compromise on Swaps-Desk Provision

(Bloomberg-)

Senator Blanche Lincoln is considering compromise language to her derivatives proposal that would phase in over two years a requirement that commercial banks push out their swaps trading desks to subsidiaries.

The proposal also would allow the Federal Reserve to provide system-wide emergency assistance to swaps dealers, according to a draft of the compromise obtained by Bloomberg News and confirmed by Lincoln’s office today.

The changes are aimed at clarifying questions about the original language and do not pull back from the purpose of the measure, which is to separate commercial banking from derivatives trading, Courtney Rowe, Lincoln’s spokeswoman, said today in an e-mailed statement.

The plan “is a strong provision that will protect depositors and get banks back to the business of banking,” Rowe said. “These clarifications will clear up any questions that exist about the intent of the provision without compromising the legislation.”

Under the proposed new language, during the phase-in federal banking agencies would have two years to determine the impact of the measure on mortgage lending, small business lending, jobs and capital formation. The proposal does not provide for any action after the study.

The revised language being considered by Lincoln would clarify that banks with access to Federal Deposit Insurance Corp. deposit guarantees and the Federal Reserve’s discount lending window would be allowed to hold a separately capitalized swap dealer in an affiliate of the bank holding company.

Reconciling the Bills

The derivatives language is one part of the larger financial regulatory overhaul being completed this month by House and Senate negotiators, who will continue to meet this week to reconcile their bills. Congressional Democrats said they expect to have legislation ready for President Barack Obama’s signature by July 4.

The proposal remains in its early stages and has not been presented to lawmakers, according to a Senate aide. Negotiators are currently scheduled to take up the derivatives language in the final days of the conference committee, the aide said, declining to be identified because the talks aren’t public.

Lincoln, an Arkansas Democrat who is chairman of the Senate Agriculture Committee, in April proposed separating swaps trading from commercial banking. She has advocated for the rule in the face of opposition from federal regulators, lawmakers and banks.

Dimon Lobbying

The banking industry focused much of its lobbying efforts on removing the provision, including personal lobbying of lawmakers by JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon. Banking officials and regulators including Fed Chairman Ben Bernanke said the original proposal could introduce more risk into the system by eliminating a primary hedging mechanism and could restrict bank capital at a time of economic stress.

Derivatives, such as stock options, are financial instruments based on the value of another security or benchmark. Some instruments, including contracts that insured mortgage- backed bonds, have been blamed for fueling a financial crisis that led to the worst recession since the Great Depression.

Consumer advocates and labor groups -- many of the same people who opposed Lincoln in the primary election battle she won last week -- have supported the provision from its inception. Lincoln has picked up other high profile support in recent days, including from Federal Reserve Bank of Dallas President Richard Fisher and Thomas Hoenig, the president of the Federal Reserve Bank of Kansas City.

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