Ackerman Seeks Changes In Derivatives’ Provisions In Senate’s Wall St. Reform Bill
Expressing concerns that the U.S. Senate’s financial reform bill would force banks to spin off their $600 trillion derivatives business and take it overseas, Congressmember Gary Ackerman has appealed to both Democratic and Republican House leaders to block inclusion of the Senate’s derivatives proposal in the final bill being formulated jointly by both houses of Congress.
“In the interest of the continued recovery of America’s financial industry and the United States’ economy—and as supporters of comprehensive but sensible financial regulatory reform, we ask that you strongly advocate for the House—passed derivatives language during the conference with the Senate on H.R. 4173,” Ackerman urged House Speaker Nancy Pelosi and Republican Minority Leader John Boehner.
Derivatives are complex financial instruments not generally understood by the general public or even some investors. They were said to have played a large role in the financial industry near collapse, especially the mortgage industry meltdown.
Wall Street and the banking industry oppose the Senate bill’s restrictions on derivatives, and so does President Barack Obama, who has reportedly said he will take a “strong hand” in developing the final bill, which could mean changes in dealing with derivatives as they are handled in the Senate bill.
Ackerman’s plea comes as the House and Senate begin to work on reconciling the bills they each passed to reform the financial markets and avoid another near collapse of the U.S. economy that almost happened in early 2009.
Ackerman, a senior member of the House Financial Services Committee, warned that the Senate-passed bill includes a provision that bars banks involved in trading derivatives from access to several important federal banking institutions, including the Federal Deposit Insurance Corporation, which insures American consumers’ accounts.
“While we strongly believe that more transparency and accountability is needed in our derivatives markets, we believe the House-passed language, requiring the use of exchanges or clearinghouses for derivatives trades, is far more pragmatic than the Senate’s approach and more sensibly addresses one of the major regulatory deficiencies that led to the near collapse of our financial system in 2008,” Ackerman (D–Bayside/L.I.) stated. “The effect of the Senate provision would be to force America’s largest banks to spin off their derivatives trading activities,” he added.
Ackerman warned that a derivatives spinoff would be very damaging to both New York’s and the United States’ economies.
“Aside from the immediate and long-lasting economic impact of the Senate’s language, we are further concerned by the implications of such a large industry moving abroad, where many other mandated and protections contained in the Wall Street Reform and Consumer Protection Act may not apply,” Ackerman explained. “The Senate derivatives language may inadvertently undermine the very intent of the legislation.”
According to published reports on the passage of the Senate bill, which the New York Times reported had a provision “that would force big banks to spinoff some of their most lucrative derivatives business into separate subsidiaries”, the House and Senate bills were said to be broadly similar.
Passage of a new law broadening controls over the financial industry was seen as a great accomplishment for the Obama administration, on a par with healthcare reform.
Obama said he had made passage of Wall Street reform one of his top priorities.
The Times also reported that Obama would “take a strong hand in developing the final bill, which would mean changes to the restrictive derivatives provisions the Senate measure includes and Wall Street opposes.
The story said the Senate bill would impose “a thicket of rules” for the trading of derivatives, the complex instruments at the center of the 2008 crisis.
Under the Senate bill, derivatives would have to be traded on a public exchange and cleared through a third party, the Times story said.
The Times also reported that under a provision written by Senator Blanche Lincoln (D–Arkansas), “some of the biggest banks would be forced to spin off their trading in swaps, the most lucrative part of the derivatives business, into separate subsidiaries, or be denied access to the Fed’s emergency lending window”.
The banks opposed this provision, and the Obama administration has also said that it sees no benefit from that particular stipulation.