(Ed. Note: We have a face-off here at CNBC.com. Senior Editor John Carney has one take on Blanche Lincoln's victory below. But Reporter Kate Kelly sees a different outcome. You can find that here).
Top Wall Street bankers say many reading the political tea leaves from Sen. Blanche Lincoln’s primary victory in Arkansas yesterday have things exactly backward.
Instead of guaranteeing strict limits on the use of derivatives by bankers, Sen. Lincoln’s victory may pave the way for the limits to be watered down or dropped altogether. Others, however, are not so optimistic.
Lincoln sponsored the derivatives language in the Senate version of the financial reform bill. A conference of House members and Senators are set to begin negotiations this week to reconcile the two bills.
The House bill doesn’t contain the derivatives restrictions.
Lincoln took up a hard line on Wall Street to fend off a challenge from the left. Unions and other liberal groups were backing Arkansas Lt. Gov. Bill Halter in his primary challenge. The crack down on derivatives was an attempt by Lincoln to show that she could get tough on Wall Street.
Now that the primary challenge is behind her, she may be willing to compromise on the language, according to several senior executives at banks that have been attempting to gauge the direction of the financial reform negotiations. All asked that I not name them or their companies, for fear of political backlash.
“This was all about the primary. Now that that’s done, she doesn’t need to fight for it. And without her fighting, that provision will die,” said one banker who has been in close contact with Capitol Hill and Obama administration.
The banks have several strong allies on Capitol Hill when it comes to diluting the Lincoln provision. House Financial Services Committee chair Barney Frank is not in favor of the provision. Nor is Senate Banking Committee chair Chris Dodd. FDIC head Shelia Bair and Fed chief Ben Bernanke are also reportedly opposed.
Big banks, such asJP Morganand Goldman Sachs , have been quietly but effectively making the case against the derivatives proposal on Capitol Hill. Both firms make substantial sums from trading derivatives.
The Senate conferees are meeting today to strategize ahead of a meeting of the full conference with House members scheduled for tomorrow.