Working into early yesterday, lawmakers drafting an overhaul of bank regulations sought to soften a contentious Wall Street restriction that would force large bank holding companies to spin off their lucrative derivatives business.
US House Democrats, prodded by moderates and members of the New York congressional delegation, offered to limit the reach of the restriction to only the riskiest derivatives trades. Banks would be allowed to keep some of their more common derivatives business.
The negotiations remained fluid, however.
PHOTO: REUTERS
The provision stood out as the last major sticking point in a sweeping overhaul of financial regulation. US congressional leaders were eager to wrap the bill up early yesterday, with hopes of getting final US House and Senate passage before July 4.
Negotiators cleared a deadlock on another potential obstacle, limiting the ability of banks to carry out high-risk trades or invest in hedge funds and private equity funds.
The US House-Senate panel has been working late over the past two weeks to resolve differences between the two bills. The legislation aims to avoid recurrences of the 2008 financial meltdown by requiring a regulatory council to look for threats to the system, by creating a consumer protection bureau, forcing large failing firms to liquidate and policing financial instruments that have been largely unregulated.
However, US Representative Barney Frank, the chairman of the panel assembling the bill, and US Senate Banking Committee Chairman Christopher Dodd left the most contentious issues for last.
Lobbyists, government regulators and administration officials ducked in and out of the panel’s meeting room, holding sidebar meetings with lawmakers over details in the bill.
The derivatives issue was the most nettlesome. Derivatives are complex securities often used by corporations to hedge against market fluctuations. However, they also have become speculative instruments for financial institutions, the most notorious of which were credit default swaps that hedged against loan failures.
US Senator Blanche Lincoln was the leading advocate of a US Senate provision that would force large bank holding companies — firms like JPMorgan Chase and Bank of America — to place their derivatives business in subsidiaries with their own source of funds.
Lawmakers were eager to accommodate Lincoln because her vote is crucial in the US Senate, which typically needs 60 vote margins to clear procedural obstacles in major pieces of legislation.
US House Agriculture Committee Chairman Collin Peterson, a Lincoln ally, proposed that banks only spin off their riskiest derivatives trades, including the credit default swaps blamed for precipitating the crisis. The compromise offer would permit banks to keep some of their lucrative business based on trades in derivatives related to interest rates, foreign exchanges, gold and silver. Banks would be allowed to trade in derivatives to hedge against market fluctuations.
US President Barack Obama’s administration had pushed for restrictions on all bank trades, a proposal especially championed by former US Federal Reserve chairman Paul Volcker. In general, in the US House-Senate agreement, bank holding companies that have commercial banking operations would not be permitted to trade in speculative investments.
US House and Senate negotiators agreed to let bank holding companies invest in hedge funds and private equity funds but would be limited to investing no more than 3 percent of their capital in hedge funds or private equity funds. There are no such conditions on banks now.
The proposal also would bar banks from betting against their clients on certain investments deals.
US House and Senate negotiators were checking off agreements on smaller differences between the bills. They agreed to:
• Set new standards for what banks keep in reserve to protect against losses, carving out a grandfather exception for banks with assets of less than US$15 billion. The Securities and Exchange Commission (SEC) has been working on new regulations and the negotiated provision requires the SEC to consider the result;
• Authorize the SEC to adopt rules that give shareholders of publicly owned companies the right to nominate candidates for corporate boards of directors. They also agreed to require regulators to study whether stock brokers should be more accountable for the advice they give clients and use the study results in writing new rules;
• Big banks succeeded in a last-ditch lobbying effort to kill a US House proposal to add ailing mortgage giants Fannie Mae and Freddie Mac to the type of firms that would be subject to liquidation at financial industry expense. Their collapse has already cost US$145 billion. Banks worried they would be on the hook for the cost.
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