Centrist House Dems oppose Lincoln's derivatives measure

Centrist House Democrats are pressing lawmakers to remove a controversial Wall Street overhaul provision requiring banks to wall off derivatives trading.

The New Democrat Coalition, a group of 69 centrist House Democrats, is preparing a letter that will urge lawmakers to drop the provision, championed by Senate Agriculture Committee Chairwoman Blanche Lincoln (D-Ark.). Members are still collecting signatures for the letter.

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The measure is among the most controversial and heavily lobbied aspects of the 2,000-page financial bill that lawmakers want to finalize this month. A 43-member conference of House and Senate lawmakers aims to resolve differences in the bill before the July 4 recess.

Wall Street banks, business associations and some leading financial regulators are strongly opposed to the Lincoln provision, but it has remained in the legislation for months with support from liberal Democrats and some regulators.

Lincoln on Monday looked to clarify her measure, saying it would allow umbrella bank holding companies to own swaps dealers, but only if they are separated from their traditional banking units. The bank holding companies would need to raise billions of dollars in capital to support the swap dealer units.

The aim of the provision is to prevent federal emergency assistance from helping derivatives trading operations. House Financial Services Committee Chairman Barney Frank (D-Mass.) and Senate Banking Committee Chairman Chris Dodd (D-Conn.), among others, continue to negotiate in private on the provision, which is likely to be considered next week in the conference.

The New Democrats argue the provision would increase risks in the financial system and shift derivatives trading to less-regulated financial firms. The lawmakers argue the conflict-of-interest concerns are addressed by a separate proposed ban on proprietary trading at banks that is dubbed the “Volcker rule.”

Their concern is part of a broad letter laying out views on the bill’s consumer protection, derivatives and other sections.

New Democrats, including Reps. Mike McMahon (N.Y.), Jim Himes (Conn.) and Melissa Bean (Ill.), played a large role in crafting House financial legislation in 2009 and worked closely on the derivatives section. The House Financial Services Committee and full House did not debate a provision similar to Lincoln’s.

The group is also concerned that another section of the legislation now under debate would harm commercial “end-users” of derivatives. New Democrats oppose a separate provision added by the Senate establishing a fiduciary duty between swaps dealers and states, cities and pension funds.

The New Democrat letter comes as conferees make their way through scores of differences between the House and Senate legislation.

On Tuesday, lawmakers moved closer to permanently increasing deposit insurance to $250,000 at banks and credit unions. The provision would be retroactive to Jan. 1, 2008, and would help depositors at the failed IndyMac bank and a handful of other banks.

Frank said the retroactive part of the provision would cost $170 million for IndyMac depositors and $10 million for those who had money at other banks.

The conference also moved closer to requiring hedge funds and private equity funds with at least $150 million in assets under management to report to the Securities and Exchange Commission (SEC). Venture capital firms would not be subject to the requirement.

The House is planning to urge the Senate on Wednesday to accept changes to the auditing power and governance of the Federal Reserve. The House had passed legislation in December opening the Fed up to new wide-ranging audits; the Senate curtailed the new powers so as not to apply to monetary policy.

Frank said Tuesday that he wants to change the bill to provide additional powers to review private parties that receive help from the central bank. The changes would not apply to monetary policy, he said.

“The Fed will not be interacting with any private party without that ultimately becoming public, although not right away, because you don’t want to affect markets,” Frank said of the proposal.

Frank said the House would also push Wednesday to remove a provision in the legislation making the New York Fed’s president a presidentially appointed position.

“I think the whole question of how the regional banks’ presidents are selected, not just at the New York Fed … that is a subject for next year,” Frank said.

The Fed and financial industry have raised concerns about the New York Fed measure.

“Any step in the direction of politicizing the central bank is very dangerous — especially at a time when global markets worry about the potential inflationary implications of the Fed’s extraordinary actions during the financial crisis and mounting U.S. government debt,” said John Dearie, executive vice president for policy at the Financial Services Forum.

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