Sen. Blanche Lincoln’s proposal for derivatives reform is apparently so extreme that even the Treasury Department thinks it goes too far. And yet, increasingly, it looks like it might survive. The FT is now reporting that Paul Volcker might be onboard. So are two Federal Reserve bank presidents. The shift, it seems, has at least partially come from language clarifying that big banks like JP Morgan Chase and Goldman Sachs wouldn’t have to completely get out of the derivatives business as long as they keep those businesses in a separate affiliate that maintains its own capital reserves.
Whether or not banks wind up having to spin off their derivatives units, I’d say Blanche Lincoln has already come out ahead. (And not just because she won her primary.)
Lobbyists, including the CEO of JP Morgan himself, have expended an incredible amount of time and energy trying to get rid of Lincoln’s provision. But there are plenty of other details to hash out when it comes to derivatives reform.
Perhaps the most important one is deciding who gets an “end-user” exemption. If you’re using a derivative to hedge a real business risk—General Mills trading in corn futures, say—then you don’t have to put up nearly as much cash to show you’re good for the bet. Gary Gensler, the head of the Commodity Futures Trading Commission, has been a strong proponent of limiting the number of companies allowed such exemptions. Back in April, Alan Blinder did a great job of explaining why it’s so important to limit exemptions.
Now, I hardly think lobbyists are ignoring the end-user exemption issue. But by having a much larger fight on their hands with the Lincoln proposal, it’s certainly not front and center like it might be otherwise. I’m sure Lincoln truly believes in the validity of spinning off derivatives units. I don’t think her bringing up the idea was a purely tactical move. Though maybe it’s helping in that way, too.