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Election in Arkansas May Change Face of Financial Reform

Monday, 7 Jun 2010 | 11:07 AM ET

Senate runoffs are rarely a topic of hot debate on Wall Street trading floors. But a controversial piece of legislation has made Tuesday’s horse race between Arkansas Democrat Blanche Lincoln and her rival, state Lt. Gov. Bill Halter, an unexpected draw.

Blanche Lincoln
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Blanche Lincoln

A two-term officeholder who chairs the powerful Senate Agriculture Committee, Ms. Lincoln turned heads in April when she introduced a bill amendment designed to up-end the way Wall Street trades derivatives, financial instruments that track securities like stocks and bonds.

Derivatives called credit-default swaps (CDS) played a major role in the financial crisis. Critics say they contributed to the troubles at Bear Stearns, American International Group, and many other companies, as rising speculation on the likelihood of debt defaults spurred anxiety within the market and led to unmanageable costs for some swap sellers.

Ms. Lincoln’s proposal, presented in Section 716 of the Senate’s nearly 1,600-page financial regulation reform bill, would wall off a bank’s derivatives-trading unit from other parts of its business—a move that could limit the profitability of such trades.

Amendment foes say it would also curb a firm’s ability to hedge the risky trades it makes for clients, forcing the firm to either dial back its client services or put itself at unnecessary financial risk.

The amendment has survived thus far, and will be discussed as part of the reconciliation process expected to start this week, as Senate members meet with their counterparts in the House of Representatives to jell their respective financial regulation reform bills.

But Wall Street officials, who have invested heavily in lobbying against the Lincoln amendment, are hoping tomorrow’s Arkansas runoff race will be its death sentence.

Their thinking: the amendment has been preserved in order to help Ms. Lincoln’s chances, and with the election imminent, she no longer needs the derivatives curbs as a talking point on the stump.

Spokespeople for Ms. Lincoln and the Senate Committee on Banking, Housing & Urban Affairs did not respond to requests for comment.

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Programming note: "The Strategy Session," hosted by David Faber and Gary Kaminsky, begins Monday, June 7 at Noon ET on CNBC.

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