Reform Bill Will Cause 'Massive' Credit Squeeze: Gregg

The likely final version of the financial regulation bill, if passed into law, will cause a credit crunch and stunt economic growth, primarily because of the derivative language in the bill, Sen. Judd Gregg, R-NH, told CNBC Thursday.

"The senate bill, which has the Lincoln language in it, will cause a massive contraction in credit in this country because it's a totally inoperable, in my opinion, approach to derivatives. It doesn't face up to the reality with how derivatives should be managed," said Gregg.

Gregg, who is a member of the conference committee that meets Thursday afternoon to work to merge the two chambers' bills, said the Senate Bill will make up the primary text for the final version of the bill, that version includes Sen. Blanche Lincoln's, D-Ark., provision that could force banks to spin-off their derivatives-trading operations.

Lincoln, who won the primary in Arkansas Tuesday, has apparently won favor with voters despite strong oppositionfrom big banks, Republicans, the Federal Reserve and members of her own party, including Rep. Barney Frank, D-Mass.

Instead of spinning off the derivative swap desks, Gregg said that derivatives should be managed with "more clarity, more margin, more liquidity, but allow for reasonable exemptions."

"There are all sorts of unintended consequences, which are pretty obvious, which is that you are going to cause an economic slowdown as a result of not having credit available," said Gregg."This bill really ignores the core problems and takes on other issues, and some of them it doesn't take on in such a great way, like derivatives."