Nothing, it seems, attracted more recent attention on financial reform as Senator Blanche Lincoln's provision banning banks from trading derivatives, which divided regulators, members of Congress and the administration. Most of the division was over how the ban would function: Would it prevent banks from engaging in risky practices, as Lincoln and other reformers argued, or did it go too far, barring banks from prosaic hedging and potentially driving derivatives trading into the shadows, as the Treasury Department, former Federal Reserve Chair Paul Volcker, and other regulators worried?
Now, though, it appears a compromise has been reached that will restrict banks' risky practices but also satisfy the concerns of regulators by forcing banks to create separately capitalized subsidiaries for their derivatives trading desks. The Atlantic's Daniel Indiviglio has a solid explanation of the agreement here, including an important note for reformers who might worry that this change might water down the provision: This is how Lincoln has described the effect of the provision for over a month now. Combined with lawmakers' intent to strengthen the Volcker rule to prevent speculation, the Lincoln swaps ban would prove costly to the banks.
This is why you see Senate Banking Chair Chris Dodd expressing support for Lincoln's position, along with Volcker, who originally opposed the idea. While the Treasury refuses to comment on the matter, it seems likely it will get behind this clarified position given the momentum behind it and the terrible politics of dropping a proposal that's harsh on the banks from the final bill.
-- Tim Fernholz
