Pass the Hot Derivative

For those of you who might not be able to open the Roll Call link:
Lincoln’s Derivatives Plan Meets Resistance in Her Caucus
April 22, 2010, 6:32 p.m.
By Emily Pierce
Roll Call Staff

Senate Agriculture, Nutrition and Forestry Chairman Blanche Lincoln (D-Ark.) appears to be fighting an uphill battle to get her piece of the financial regulatory reform bill into the larger package before it hits the floor, possibly next week.

Though the Agriculture panel approved a bill this week that would regulate complicated financial instruments known as derivatives, Senate Democratic leaders and Senate Banking, Housing and Urban Affairs Chairman Chris Dodd (D-Conn.) do not appear to be making it easy for Lincoln to plant her flag in Dodd’s broader measure, which already includes a less rigorous derivatives piece. Lincoln’s bill has been described as to the left of what most Democrats and the Obama administration have been seeking, but she did draw the support of one Republican —Sen. Chuck Grassley (Iowa) — during committee consideration.

The issue flared Wednesday during a meeting of Democratic committee chairmen, when the topic of derivatives came up. After Dodd suggested that her measure may not be folded into his bill but would have to battle it out on the floor as a stand-alone amendment, Lincoln “threw a fit,” one source said, and argued passionately for her committee’s bill.

Senate Majority Leader Harry Reid (D-Nev.) told Lincoln to work out her differences with Sen. Jack Reed (D-R.I.), a Banking panel member whom Dodd tapped to work on derivatives. But sources said Lincoln would prefer to work with Dodd on a chairman-to-chairman level.

Fans of Lincoln’s bill came to her aid at Thursday’s regular Democratic Policy Committee lunch with harsh criticisms for Dodd and Reid, sources confirmed.

At one point, Sen. Maria Cantwell (D-Wash.) stood up and attacked leaders for not showing Lincoln the respect she deserved on the issue. Cantwell also implied derisively that Banking Democrats believed they were smarter than others in the caucus, the sources said. With White House Senior Adviser David Axelrod, Communications Director Dan Pfeiffer and other presidential staff in attendance, Cantwell saved her sharpest criticisms for White House economic adviser Larry Summers and Treasury Secretary Timothy Geithner, who she said were working at cross purposes with Democrats in the Senate. Cantwell’s office did not return calls seeking comment.

Sen. Bill Nelson (D-Fla.) also rose to speak in Lincoln’s defense, sources said, but his rhetoric was more tempered.

Though she declined to characterize either meeting, Lincoln acknowledged that she is seeking equal treatment for her bill.

“First of all, I’m very grateful for, you know, a lot of support from colleagues that we’ve done a good job and I think they see that,” Lincoln said Thursday afternoon.

She added that she is determined to make sure her legislation, or a compromise she approves of, makes it into the underlying bill and does not get set up for near-certain failure as a stand-alone amendment.

“I was always told that it was going to be merged into the bill before we go to the floor,” Lincoln said. “I want to make sure that without a doubt, yes, I have a privileged ability to be able to be a part of this bill because that issue of derivatives squarely falls in the jurisdiction of the Agriculture Committee. So not only on behalf of myself, but on behalf of the Members of the Committee, I want to reinforce that and ensure that we maintain our jurisdiction and we maintain our place in the bill.”

Both Lincoln and Dodd said they believe they will be able to come up with an agreement of some sort before Reid calls a filibuster-breaking vote Monday evening on the larger Dodd measure.

“I’m confident we’ll resolve it,” said Dodd. Still, Dodd indicated that the issue would likely come up as an amendment.

That position was echoed by Senate Majority Whip Dick Durbin (D-Ill.), who said Lincoln is “in a difficult position” because Dodd’s bill was reported first and placed on the Senate calendar. Changing that bill to accommodate Lincoln could take more time than Reid may be willing to give as he tries to force a Monday showdown with Republicans who have said they may block it from coming up if the measure does not meet their standard for bipartisanship.

“Now, here’s Harry Reid who says, ‘What am I supposed to do? If I’m supposed to merge these two bills, then I’ve got to withdraw the Dodd bill, merge them, start over again on the calendar,’” Durbin explained, saying the process could take “days or weeks.”

Durbin added that Reid “is saying to [Lincoln], ‘Sit down with Dodd. Find out how close you can come and whether you can reach an agreement, which would be the ultimate positive outcome, and then we’re going to find out how we can bring the Lincoln language into the Dodd bill with the two of them on the floor.’” Durbin indicated that would likely be accomplished through an amendment, rather than as a part of the underlying bill.

However, a substitute amendment that replaces the entire bill could be used to insulate Lincoln’s piece from the dangers that more discrete amendments face. To take that option, Lincoln and Dodd would need to reach a deal on derivatives before the Senate adopts the motion to proceed to the measure.

One source speculated that Democratic leaders and the White House want Lincoln’s derivatives legislation to fail, because they do not support her approach.

A derivative is a financial product in which investors bet on the future price of commodities or other financial products. Derivatives are often used by companies who want to try to lock down lower prices for commodities, such as oil or agricultural goods.

In recent years, the derivatives market that bases its futures on financial products has ballooned. For example, investors can bet on future changes in interest rates or on the credit risks associated with loans or other financial instruments.

Risky mortgage-based derivatives have been blamed in part for the financial meltdown in the fall of 2008.

Jay, why is it NOT feasible to bar or separate banking from derivatives trading? Thanks much for rollcall piece (I got link open) but it doesn’t really answer this. It only lists turf-infighting (and sorry for continuing to ask you unanswerable q.’s, not tormenting you but if I had answers there would be no need to ask, right?). Glass-Steagall separated many “banking” and “trading” practices (and it worked too so why not bring it back, but I digress). Why does a bank have to trade swaps with a peer? They don’t. Does Goldman really want to be a publicly traded hedge fund instead of pretending to serve clients or “offer” banking stuff in order to get Fed money? Thanks for your thoughts.

Is it just me or does “the Hot Derivative” sound like it should have an interesting definition on urban dictionary?

JNS-named names of who you think might be considered moderate AND provided the Roll Call text.
.
Thank you!

Voters don’t have a clue what a “derivative” is, just that Wall Street banks made billions – and ruined the economy – off of them. Textbook case of populism masking ignorance…

http://www.political-buzz.com/

Jay I do not understand why the head of the FDIC has gone without criticism, on the whole banking mess.
Sheila Bair has had to close a lot of banks that I think the FDIC examiners had to have known were in trouble a long time ago.

Not feasible? Sure it is. It’s in the bill. Pass it.

I also wonder about footdragging on bad banks. Hopefully we don’t see a repeat of the ‘80’s S+L mess, but probably not. FSLIC really did lack sufficient cash to shut down enough S+L’s. I think FDIC is ok here since they also have a 500bil line of credit (I think it expires at end of this year but even the Senate delicate flowers are not stupid enough to refuse renewal). I wish Jay, Adam, (even) Michael, or CC blog teammates (Stephen, Barbara, etc.) would add more insights.

Decon, I wonder if the foot dragging had not been done maybe the problems the bigger banks were having might have been found out sooner?

Thanks for this reporting, Jay Newton-Small.

I think you’re right. They should’ve found out / acted sooner. If the FDIC still keeps secret lists of banks to watch, can’t we watch them too? We have to do our own homework or use a site like bankrate.com. I understand the fear of bank runs but it’s our money and we have a right to know how safe are our banks.

So in a piece of legislation that is supposed to pretend to be tough on derivatives, the Democrats put in a provision that they don’t like because it’s actually tough on derivatives, hoping that they could sacrifice it to the GOP, so that they could win the “bipartisan” award (kind of like the “every child is special” certificate), but they forgot that the GOP refuses to negotiate on anything, even if it would bring the final bill closer to what the GOP wants, and so now the Democrats can’t figure out how to gut their own bill?

Brilliant!

dx/dt