What Will Primary Win Mean for Financial Reform?

(Ed. Note: We have a face-off here at CNBC.com. Reporter Kate Kelly has one take on Blanche Lincoln's victory below. But Senior Editor John Carney sees a different outcome. You can find that here).

Has Arkansas Sen. Blanche Lincoln’s surprise victory over Democratic challenger Bill Halter last night helped the chances of her controversial financial reform legislation?

Possibly, say Capitol Hill watchers on Wall Street—many of whom have spent recent weeks lobbying vigorously against Lincoln’s amendment to the Senate’s reform bill, which would likely force the trading of derivatives to be carved out of banks’ core operations.

Others on Wall Street, however, believe that Lincoln's victory over a more liberal primary opponent will actually free her to water down or even drop the derivatives proposal.

Derivatives, financial instruments that track underlying securities like stocks and bonds, are a huge moneymaker for banks.

Banks argue that derivatives are also important hedging tools, and believe they should be kept within core trading operations, where they can be easily funded and supervised.

And the banks received support from some powerful government officials – including Federal Reserve Chairman Ben Bernanke and Federal Deposit Insurance Corp. (FDIC) Chairman Sheila Bair – who have argued that a derivatives spinoff might weaken the system.

Heading into Tuesday’s runoff, many bank officials were praying that the resolution of Lincoln’s primary election would also mean the end of the derivatives carve-out. But, helped by stump support from President Bill Clinton, Lincoln captured 52 percent of the vote, securing her position in the fall election.

In the meantime, she’ll remain an important voice on the committee charged with forging a final version of the reform bill, which is set to meet tomorrow in Washington. Legislators from the House and Senate are aiming to get their compromise bill to President Barack Obama’s desk by July Fourth.

Blanche Lincoln
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Blanche Lincoln

Until then, the Lincoln amendment’s foes are gritting their teeth.

Remarkably, at least one of the proposal’s big critics is also one of Ms. Lincoln’s most generous supporters.

J.P. Morgan Chase, which has strongly opposed the derivatives carve-out, was Lincoln’s fourth-largest financial supporter in the current election cycle—contributing $45,500 to her war chest since 2005, according to data kept by the Center for Responsive Politics. (Of course, the derivatives amendment was introduced in the final throes of that cycle.)

Credit Suisse Group, the large Swiss bank, was No. 9, with total donations of $31,800.

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