Banks yesterday won an important victory over the part of the financial reform package they most feared—and almost no one noticed.
Senator Blanche Lincoln is considering a “compromise” that will neuter her proposal to ban banks from trading derivatives by including a long delay before requiring any change to the swaps business, allowing banking regulators discretion about implementing the provision, permitting special derivatives entities to operate inside of federally supported bank holding companies, and pre-authorizing federal bailouts of the derivatives entities if they blow themselves to financial smithereens.
Lincoln’s spokesperson says the derivatives proposal remains “a strong provision,” which might make you think it remains a strong provision.
Under the proposed compromise, any spin-out of swaps desks will be phased in over a two-year period. During that time, federal banking agencies will be tasked with considering the impact of the measure on mortgage lending, small business lending, jobs, and capital formation.
Those vague and open-ended considerations will provide wiggle-room for the federal banking agencies to avoid implementing the new swaps rules.
Make no mistake about what is going on here. The swaps provision is being transformed from a mandatory ban into something over which banking regulators have discretion. And the banking regulators—from Fed chair Ben Bernanke, to FDIC chief Shelia Bair, to SEC head Mary Schapiro—oppose the ban on swaps altogether. Given wiggle room, they will wiggle right past Senator Lincoln rule.