Now, Senator Lincoln has introduced a new bill which will be voted on in the The Senate agriculture committee. The current guesses are it will be voted out of committee and onto the Senate floor by April 26th. Here is the actual bill text and here is her press release:
The Wall Street Transparency and Accountability Act of 2010
Senate Committee on Agriculture, Nutrition, and Forestry, Chairman Blanche Lincoln
This is landmark reform legislation that will bring 100 percent transparency to an unregulated $600 trillion market, close all loopholes and keep jobs on Main Street. This will protect taxpayers, jobs, consumers and the global economy, and will go further than any other proposal to prevent future bailouts.
Historic Reform of the Derivatives Market
Brings 100 Percent Transparency to Market with Real-Time Price Reporting:
Wall Street will no longer be able to make excessive profits by operating in the dark. Exposing these markets to the light of day will put this money where it belongs – on Main Street. The public will see what is being traded, who is doing the trading and, most importantly, regulators can go after fraud, manipulation and excessive speculation.
Lowers Systemic Risk by Requiring Mandatory Trading and Clearing:
Trading and clearing of swaps lower risks and make the entire financial system safer. Transactions, determined by the regulator, will be required to clear through a clearinghouse. In addition, these transactions must be traded on a regulated exchange, which will provide further market transparency.
Prevents Future Bailouts and Addresses “Too Big to Fail”:
Banks need to be kept in the business of banking. The taxpayer funds used to bail out AIG and other Wall Street firms will never be used for this purpose again. The Federal Reserve and FDIC will be prohibited from providing any federal funds to bail out Wall Street firms who engage in risky derivative deals.
Loopholes have allowed far too many to avoid the law of the land or set up shell companies to claim exemptions. This bill gives regulators the authority to close any loophole they find, protecting the markets, taxpayers and the economy.
Protects Jobs on Main Street:
The interests of Main Street will be protected. Commercial businesses and manufacturers who use these markets and customized contracts to manage risk will still be permitted to do so without imposing additional margin costs. This will protect American jobs and keep consumer costs low.
Protects Municipalities and Pensions:
Swaps dealers will have a “fiduciary duty,” just like investment advisers, that will require the interests of municipalities and pension retirement funds be put first; ensuring Wall Street doesn’t take advantage of Main Street and taxpayers.
Regulates Foreign Exchange Transactions:
Foreign exchange swaps will be regulated like all other Wall Street contracts. At $60 trillion, this is the second largest component of the swaps market and must be regulated.
Increases Enforcement Authority to Punish Bad Behavior:
Regulators will be given broad enforcement authority to punish bad actors that knowingly help clients defraud third parties or the public such as when Wall Street helped Greece use swaps to hide the true state of the country’s finances.
CBS Market Watch reviewed the bill:
Wall Street firms registered as banks would need to spin off derivatives trading desks to be eligible for the protections made available to banks. A Wall Street financial institution engaging in "risky derivative" deals would not be eligible for federal bailouts.
The bill also requires a large segment of the derivatives market to trade through clearinghouses, which are intermediaries between buyers and sellers that make sure both parties have enough capital. Clearinghouses require participants in a transaction to post capital and would cover losses in case a participant in a derivatives contract can't pay up.
As noted previously the House bill has exemptions on derivatives that make regulation fairly symbolic and useless.
On the other hand, businesses highly dependent on volatile commodities, such as airlines and fuel, are exempted. My question is where is it written a clearing house adds significant additional costs and what is really the issue with end users hedging on costs in exchanges? Even more interesting, there was a much tougher amendment to ban credit default swaps and force all derivatives onto exchanges by Rep. Peterson, (MN-D) back in 2009 According to Deal Book, lobbyists killed that bill. Recall Senator Lincoln is up for re-election in Arkansas. CBS Market Watch again:
Lincoln is closer to the House bank-reform bill, which also gives end-users a clearer exemption from clearinghouses. However, Dodd's bank-reform bill gives regulators more authority to require commercial end-users trade through clearinghouses.
This bill does seem to be a great improvement and incorporate the Volcker rule, in other words to separate out investment banking from commercial, at least on the derivatives front. This is section 106 of the bill, where anyone engaging in derivatives is denied even FDIC insurance or access to the discount window. I don't know if that's enough to firewall commercial from investment banking, but it's a huge improvement.
Bear in mind this will be introduced as an amendment and bear in mind that our lovely Wall Street lobbyists are just assuming they will win 100% (and given their track record, fair assumption). It could be those lobbyists rein in their puppet theater and block the entire bill over this. That said, the framework for financial reform in the Senate is still the Dodd Dud. Of course Goldman Sachs is really helping make the case we might just need to get rid of these glorified fraud shell games called structured financial products. That's my druthers, nothing gets approved until thoroughly analyzed and investigated by an independent government agency, like the FDA (although not corrupted).
President Obama has said he will veto a bill that doesn't have strong derivatives reform (whatever that is defined to be!). Oh yeah, so far the Republicans are out to vote no. What a surprise.