Pass the Hot Derivative

  • Share
  • Read Later

On paper and in the public, most Democrats love Arkansas Senator Blanche Lincoln’s proposal to force banks to divest their derivatives operations. It’s populist and gets at the heart of the credit default mess that caused the financial meltdown. Heck, President Obama even warned he’d veto a bill that wasn’t tough on derivatives.

But, behind the scenes, most Democrats acknowledge that it’s not feasible to pass a bill barring banks from the derivatives business. The problem is: the provision is in the bill, how do Dems get it out? They’d been hoping that a bipartisan negotiation with Senate Banking Committee ranking member Richard Shelby of Alabama might have yielded a compromise in which it gets stripped out – but that’s not looking to happen any time soon. Just about no one wants to be the person to introduce an amendment to strip the provision out – and the White House, while not delighted with the measure, hasn’t been a profile in courage in opposing it (and thus giving Senate Dems political cover). Instead, a steady stream of regulators – most noticeably the FDIC’s Sheila Bair – have come out against the measure providing Dems the first line of retort for any lefty criticism when it does, finally, get removed.

In the meantime, debate on the financial regulatory reform bill is expected to continue through next week. This week we expect a stream of progressive amendments from Bernie Sanders et al, which should make for some interesting debate (Should the Fed be audited? And should the government break up big banks?) but few of which are expected to pass. Next week is anticipated to bring a spate of tough GOP amendments before – Dems hope – they file for cloture on Wednesday and move for a final vote by May 14.

There are three schools of thought on the passage of this bill. First is that Shelby and Senate Banking Committee Chairman Chris Dodd strike a bipartisan agreement that makes the bill palatable to a substantial number of Republicans and the bill passes 80-20 (ball park). Second, no agreement is reached but a few GOP moderates (and here, I mean on this issue — not as a blanket description) such as the ladies from Maine, retiring Senator George Voinovich from Ohio, Iowa’s Chuck Grassley and Massachusetts’ Scott Brown sign on and the bill passed by a margin of 62 to 64 votes. And third, that someone – anyone – trips over the complex set of agreements and Kabuki dances needed to happen between now and final passage and the bill goes down in flames. So far as I can tell, there’s about a 30% chance of any of these happening.