At 11:55 today, Barack Obama will speak on financial reform, and apparently it’s going to be one of those speeches covered by everyone. It will be held in New York symbolizing his drop into enemy territory.
Unfortunately, it doesn’t sound as though he’ll dive deep into specifics.
According to Bloomberg, he’s going to slam “risky decisions” that got us into the financial crisis, and he’s going to urge Wall Street to support reform.
- Protecting American taxpayers in the event of a crisis (not sure how to do that).
- Imposing a Volcker Rule.
- Setting new transparency rules for derivatives.
- Strong consumer protection.
- Reforming pay.
None of these principles are very specific. For example, nobody really knows what the Volcker Rule would do in practice.
But if you’re looking for something specific to watch, it’s the third principle, on derivatives that’s key.
You really need to be paying attention to Sen. Blanche Lincoln’s derivatives bill amendment, which passed the Agriculture Committee. Because in the old days, derivatives had to do with futures relating to farm products, that’s the committee that regulates derivatives.
Anyway, the amendment, quite simply, would seriously impede banks’ ability to use derivatives.
Lincoln’s spinoff provision would bar companies that deal in swaps from bank privileges such as accessing the Federal Reserve’s discount lending window emergency liquidity function and the Federal Deposit Insurance Corp.’s deposit guarantee.
The nation’s largest commercial banks are the most dominant in the market precisely because they have such access, according to Brian Gardner, an analyst at Keefe, Bruyette & Woods in Arlington, Virginia, who was staff director on the House Financial Services Committee for former Louisiana congressman Richard Baker.
As we’ve noted earlier, we believe part of the reason Lincoln is pushing this amendment is because she’s politically weak at home after voting YES on healthcare. Going after the banks and raising her profile is a smart political move.
So the huge battle will rage around this question.
Some Democrats are against it, but according to The Hill, Harry Reid (also in trouble) is in favour of it.
As for the policy of it, even if you hate the idea of banks dealing in derivatives, there are reasons to find the Lincoln amendment noxious.
Craig Pirrong makes a strong case that this will greatly increase risk to the system.
There are many bad features in the Lincoln bill. Arguably the worst (though the competition is stiff!) is the proscription on any “Federal assistance”, including Fed lending, to financial institutions that trade derivatives, including clearinghouses. Especially when combined with the mandated expansion of clearing, this is extremely dangerous.
Clearinghouses can blow up. It has happened historically, and it almost happened with disastrous effects during the ’87 crash. Arguably the only thing that prevented that from happening was the intervention of the Fed. I strongly suggest that Lincoln, or her staff, read the Brady report on the Crash to get some understanding of that. Or better yet, read Bernanke’s “Clearing and Settlement During the Crash” (3 Rev. Financial Stud. 1990 at 133). Read his whole post >
To borrow an insight from Timothy Carney, The Lincoln amendment is going to be the “public option” of financial reform, the one feature Wall Street won’t be able to stomach. If they can kill it, they’ll probably be OK with the rest.
Business Insider Emails & Alerts
Site highlights each day to your inbox.