One of the controversies in crafting financial reform is what will happen to a provision in Blanche Lincoln's derivatives-reform legislation that would ban the largest banks from operating derivatives-swaps desks. It is vehemently opposed by the industry and the Federal Reserve but also by reformers like Paul Volcker and FDIC Chair Sheila Bair, and House Financial Services Committee Chair Barney Frank has already talked about modifying it. The trouble for Lincoln is that she's facing a tight primary challenge from the left by Arkansas Lt. Gov. Bill Halter, and progressives will read any concession on the swaps ban before the June 8 primary as a reason to vote against her. Any concession afterward, should she prevail, will be seen as a betrayal.
Now, I've never been one to defend Lincoln -- her approach to fiscal policy lacks any grounding in reason and her flip-flop on the Employee Free Choice Act was craven. Nonetheless, progressives ought to make a distinction between her overall derivatives reform and the single provision to ban trading at the largest banks. When Banking Committee Chairman Chris Dodd released his legislative language in December, the derivatives title in the bill was considered a strong improvement over the House's bill. Lincoln's draft, however, was even more restrictive of industry practice -- even without banning derivatives trading at major banks -- and now makes up the bulk of the derivatives title in the final bill.
I've written before that banning banks from trading derivatives outright could have any number of negative unintended consequences, including sending derivatives trading into the much-less regulated world of hedge funds. It's highly likely that the provision will be walked back somehow in the coming weeks, if only to allow for relatively anodyne varieties of currency- and interest rate-hedging.
If that does happen, progressives shouldn't call for Lincoln's head -- so long as the capital clearing and exchange trading aren't diluted and end-user exemptions remain as tight as possible, the bill will be a serious step toward reform. That said, I'm not sure her work on this bill is cause to support her for Arkansas voters -- there's good reason to believe that her bill was drafted largely under pressure from Halter's campaign -- but should the swaps ban be eased in conference, she hasn't necessarily sold out the cause of reform.
-- Tim Fernholz
