Via David Dayen, The New York Times has come up with three proposals that are at the center of the financial-reform conference, set to begin this week: Sen. Blanche Lincoln's proposal banning derivatives desks at major banks, Sen. Dick Durbin's plan to cap the fees credit-card companies charge businesses, and the Volcker rule that would limit banks' risky business.
In my discussions with various stakeholders in the process and congressional staff, I'm seeing a slightly different focus.
- The resolution of Volcker and the derivatives desk ban is really a single issue: The Volcker rule, which reformers hope will be strengthened with language proposed by Sens. Merkley and Levin, should block banks from using their own money to speculate in exotic financial instruments, while Lincoln's proposal will likely be eased so banks can still trade derivatives to hedge risk. Whether the banks will still have the ability to run de facto exchanges for over-the-counter derivatives is still up in the air.
- More important to the derivatives regulation than those concerns, though, are the strength of the clearing and exchange requirements -- if they work, then there will be much less of an over-the-counter market for big banks to control. The drawing of narrow end-user exemptions -- which reformers, including top derivatives regulator Gary Gensler, believe shouldn't exist at all -- will be a critical matter, "our number one, two and three issue," one official says. If the derivatives market moves toward transparency and clearing, Lincoln's ban on trading will matter less.
- As for the fate of Durbin's interchange amendment, it comes down to the fortitude of legislators versus lobbyists. As policy, capping the fees small merchants pay to banks is a good idea. As political strategy, inserting it in this bill was a brilliant move -- it splits the energy of financial-sector lobbyists. It also drives a wedge between small business and credit-card companies, who both have strong advocates on the Hill.
Under-appreciated issues include the carve-outs in the Consumer Financial Protection Agency (especially the auto dealer exemption), the type of veto other regulators have over the CFPA's rule-making, and whether states will be able to make tougher rules than the federal standard. The actual location of the agency or bureau will matter comparatively little, so long as it still has independent authority, budget, leadership and rule-making.
There is a surprising amount of consensus on resolution authority and systemic risk regulation, where I don't expect the general skeleton of the Senate bill to shift dramatically.
Chairing the conference will be Barney Frank, who lost some votes on the House bill early on, while health care still distracted everyone. He's eager for another bite at the apple now that political winds are blowing in a reform direction. Frank, Senate Banking Chair Chris Dodd, and Treasury Secretary Tim Geithner are the stars of this show.
If you want to wonk out with your 162-page PDF out, let me recommend this exhaustive comparison from the legal eagles at Davis Polk. And if you're interested in any particular aspects of the bill, let me know in the comments or on the tweets.
-- Tim Fernholz
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