Reform Bill Likely to Force Banks to Spin Off Swaps

Senate banking committee staffers Sunday entered another day of talks to try to iron out a last-minute compromise over a financial reform bill ahead of a key vote Monday afternoon, with a swaps ban likely to be a centerpiece of the legislation.

A Democratic official familiar with Senate banking negotiations told the Associated Press a provision that would force banks to spin off their derivatives operations will be incorporated into sweeping regulatory legislation despite Obama administration misgivings.

The provision would cost the nation's largest banks billions of dollars in business. In an agreement struck Sunday, Banking Committee Chairman Christopher Dodd agreed to replace his proposed restrictions on derivatives with those of the Senate Agriculture Committee, chaired by Arkansas Democrat Blanche Lincoln.


Derivatives are financial products—such as corn futures or stock options—whose values depend on the values of underlying investments. Companies use them to hedge against risks, such as interest rate swings or oil price spikes. Derivatives also became vehicles for speculation and helped trigger the financial crisis.

Dodd and ranking GOP member Richard Shelby earlier appeared together on NBC’s “Meet The Press”, where they indicated the vote Monday would play out on party lines unless talks yielded a breakthrough.

Shelby said the two sides "were conceptually very close," echoing a description used by one side or the other in what has been almost six months of talks meant to etch a bipartisan deal.

Their appearance came after talks between staffs appeared to yield little progress Saturday even as it became known that one moderate Republican supported tough measures to reign in over-the-counter derivatives trading. Talks will continue today.

If a suitable compromise is reached it will very likely influence the outcome of a Monday afternoon floor vote to decide whether to end debate on the existing bill, drafted by Dodd about a month ago.

Under Senate rules, Democrats need 60 votes to proceed, but GOP leader Mitch McConnell has indicated all 41 senators in his party are prepared to vote against what is known as a cloture vote, thus making the reform bill vulnerable to a filibuster.

Snowe’s disclosure—outlined in a Friday letter to Majority Leader Harry Reid and a a press release later—has stirred some speculation that she might break with the party vote, something she has done in the past

Though the Maine Republican may not be prepared to do that Monday, her position on derivatives might embolden the Democrats in calling a second vote in the near future—as sources say it ithey are seriously considering—giving Snowe a second chance.

The derivatives issue is shaping up to be a tricky one for both parties. Snowe’s position is tougher than what Dodd has written into his bill but weaker than that of a measure crafted by Senate Agriculture Committee chairman Blanche Lincoln of Arkansas, which the panel approved—with the support of one GOP member—last week.

Republicans generally want any derivatives regulation to provide an exception for private companies that may want to use the financial product as a hedge. Though some Democrats are opposed to such an end-user exception, the majority—including Dodd—is thought to be willing to accept it so long as the provision gets through the creation of a new system, including trading and clearing procedures.

Lincoln’s proposal, however, would essentially keep banks out of the market, effectively decreasing risk and volatility.

Where Snow stands exactly is unknown but she did say she wants to begin with "the strongest proposal we can craft."

There seemed to be some grounds for optimism on the derivatives issue during talks Saturday, bur as the day wore on that seemed to fade.

Senate aides are also thought to be haggling over the new consumer financial protection agency, which would oversee financial products, such as mortgages.

Having apparently lost a battle to prevent the agency from having administrative and enforcement powers along with rule-writing ones, Republicans are now trying to curb its impact in two other ways, according to sources.

One would be to increase the powers of the agency’s board, which includes the heads of other agencies, which could block CFPA decisions; the other would limit or preclude the ability of states to pre-empt federal regulations, which would make it easier for firms to comply and reduces the risk of even tougher terms.

Another target for watering down is the amount of money the reform bill would require firms to pay upfront as part of a bailout fund for too-big-to-fail firms that might need financial help. The current bill calls for $50 billion, which though less than the $150 billion included in the House version is still considered onerous.

Also, Republicans—as well as some progressive Democrats—are worried the legislation does not do enough to protect taxpayers from future bailouts of big banks, insurers and other financial firms.

Analysts say that compromises on all these issues are achievable, but at the moment are less likely than usual. There’s a certain amount of pre-midterm election calculus involved, which makes things unpredictable.

Sources say the 5 p.m. Monday vote will take place regardless of where talks are at that time. Anything other than a solid deal is likely to draw a vote on partisan lines.

Any deal would be incorporated later into a Dodd-Shelby manager’s amendment to the original bill, which would set the stage for a strong yes vote on the actual legislation.

The Associated Press contributed to this report.