Sen. Christopher J. Dodd (D-Conn.) has offered a last-minute compromise to resolve one of the few remaining disputes over the Senate's landmark bill on financial regulation: a disagreement over derivatives that has sent shudders through Wall Street.
Three minutes before the noon deadline for amendments, Dodd filed a proposal addressing language in the bill that would force the nation's largest banks to stop trading nearly all kinds of derivatives — a move that would dramatically reshape several critical markets and deprive the firms of a major source of revenue.
Under the compromise, the Senate would keep the sweeping provision, but delay its implementation for two years while it's studied and quite likely kill it at the end.
Dodd's plan calls for submitting the derivatives rules, which were initially proposed by Sen. Blanche Lincoln (D-Ark.), for study by a federal council of regulators. Several key members of the council and Treasury Secretary Timothy F. Geithner, who could have final say under the compromise, have serious reservations about forcing banks to get out of the derivatives business altogether.
The derivatives ban advocated by Lincoln, chairwoman of the Senate Agriculture Committee, has previously won support from the full Senate and has remained part the overall financial regulation bill despite stiff opposition from the Obama administration, regulators, some lawmakers and the nation's biggest banks. Bank executives have warned about the consequences of barring derivatives trading at their firms while regulators and other administration officials say the prohibition could drive the business into the shadows, precisely what the legislation is trying to prevent.
Lincoln, who has been locked in a tough primary battle in Arkansas and spent Tuesday campaigning in her home state, has pushed to keep the provision as part of new rules to establish oversight of the vast derivatives market. The provision would prevent banks that deal in swaps, a type of derivative, from tapping into aid programs at the Federal Reserve or the Federal Deposit Insurance Corp. Lincoln has said repeatedly that her effort seeks to ensure that "banks get back to the business of banking."
Dodd, who is the author of the overall financial legislation in the Senate, has so far successfully steered it past objections from many Republicans as well as demands from the left wing of his own Democratic party. But the dispute over derivatives has continued to bedevil the bill even as it has otherwise gained momentum, heading toward what lawmakers in both parties predict will be its passage in a few more days.
Under Dodd's compromise, Lincoln might still claim her tough new derivatives rules had survived despite strong opposition and been adopted by the Senate.
The amendment calls for the new Financial Stability Oversight Council, made up of existing regulators, to study the impact of the Lincoln ban "on the swaps and security-based markets, including the effect of such prohibitions on central clearing and exchange trading of standardized swaps." Within a year, the council would report its findings, which are likely to be critical of the proposed rules because several members of the council — including the current heads of the FDIC, the Federal Reserve and the Office of the Comptroller of the Currency — have already expressed opposition to the proposal.
The Treasury secretary, who would chair the council, has final say about whether to suspend or enforce the provision. His ruling should be based on the council's recommendations and whether the trading rules would have a "material adverse effect on the financial markets and economy of the United States." Dodd's amendment says that if the prohibition is overruled by regulators, banks dealing in derivatives would instead have to comply with "minimum standards" set by their primary regulators.
Geithner, if he remains in his post for another year, would have enormous power to shape the vast market for derivatives. Not only would he decide whether big Wall Street firms can keep their derivatives businesses, he would also determine whether several other types of derivatives will be subject to tough regulation.
A senior member of Obama's economic team said that the administration has no objections to the Dodd amendment, but the person added that it was unclear whether Lincoln and other members of the Senate Agriculture Committee would go along with the proposal.
A spokeswoman at the Senate Agriculture Committee said Tuesday afternoon she was not aware of Dodd's amendment but would check the details.
At the Senate Banking Committee, chaired by Dodd, a spokeswoman also said she was not aware of the details of the proposed amendment but was checking with fellow staff members.
It remained unclear Tuesday when — or if — Dodd's amendment would come up for a vote on the Senate floor. At last count, senators had filed more than 325 proposed amendments to the bill, but only a smattering have been considered on the Senate floor. The Dodd proposal also could fall away or be replaced if another compromise on derivatives trading emerges.
Michael Greenberger, a former top official at the Commodities Future Trading Commission who has consulted with Lincoln on the derivatives legislation, criticized the amendment. He said it could leave in place risky trading activities that would come back to haunt taxpayers.
Greenberger said that if Lincoln's provision is delayed for two years — or dropped sooner — the government would remain on the hook if bank speculation goes bad. "This does not sound like a good compromise, certainly not for the American taxpayer."