Banks About to Lose Swaps Fight?
Via David Dayen, Tom Braithwaite at the Financial Times reports a blockbuster for proponents of strong bank reform: Sen. Blanche Lincoln’s (D-Ark.) provision to force Wall Street banks to spin off their swaps desks, something I thought dead in the water, might make it into the merged Senate and House financial regulatory reform bill. The article cites unnamed Hill sources who say the tides are shifting, and notes that Paul Volcker, the former Federal Reserve chairman, has softened his opposition to the measure.
Banks are likely to lose a key lobbying battle … over whether they will be forced to spin off their lucrative swaps desks, according to people familiar with financial reform negotiations in Congress. … Blanche Lincoln, the Senate agriculture chairman, is the lead proponent of the plan, which would force banks to create a separately capitalised subsidiary to house the derivatives dealing operations — a significant source of profits for big banks, such as JPMorgan Chase.
The expensive restructuring could drive activity out of the largest Wall Street banks and into more lightly regulated rivals and overseas competitors, according to the Federal Reserve and Federal Deposit Insurance Corporation, which oppose the plan. …
Mr Volcker — who has become a talisman of the financial reform effort ever since the “Volcker Rule” to force banks to end proprietary trading was embraced by Barack Obama, US president, in January — previously opposed the Lincoln provision. Although he declined to say whether he now supported it, Mr Volcker told the Financial Times that his earlier criticism was based on the belief that a stricter spin-off was in the works and it was now a “relevant question” whether damage would be done if swaps desks could be kept within a bank holding company.
Still, I would throw out a note of caution. Last week, I was talking with a source knowledgeable about the negotiations, and said I never understood the politicking around this derivatives rule. Few Democrats want this measure in the bill — not President Obama, Treasury Secretary Timothy Geithner, the F.D.I.C., the S.E.C., Rep. Barney Frank (D-Mass.) or the Federal Reserve. It’s mostly progressives and Lincoln herself who care about keeping it in there. Why push for it? My interlocutor said that Hill Democrats don’t care for the Lincoln provision itself. But they care plenty for how it improves their bargaining position and makes them seem tough on banks. Basically, with the Lincoln provision in there, they recognized they could force banks and Republicans to play ball to try to get it out — or they could leave it, and really get strong on Wall Street.
That political analysis could be wrong, of course. And we’ll know more once the conference committee picks up again tomorrow. But I still would not discount the possibility that the story is saber-rattling and the provision will ultimately be dropped or traded for some form of the Volcker Rule.