Last Wednesday, Arkansas Senator Blanche Lincoln took to the Senate floor and delivered about as fiery a speech as you’ll hear in the chamber, at least on the subject of financial reform. “Currently, five of the largest commercial banks account for ninety-seven percent of the [derivatives market],” she said. “That is a huge concentration of economic power, which is why I am in no way surprised that several individuals are seeking to remove it from the bill.”
The “it” these unnamed individuals were bent on removing is a provision Lincoln wrote that would force banks to spin off their derivatives business if they want access to federal deposit insurance and other safeguards. Lincoln stunned the financial world when she unveiled the hawkish proposal last month and promptly pushed it through the Senate Agriculture Committee, which she chairs. (Derivatives are essentially a bet on the direction of financial data, like bond prices and interest rates.)
Despite the industry’s furious efforts and the private reservations of many Democrats, the provision had survived repeated attempts on its life, and Lincoln was determined to preserve it. “She upped the ante,” one industry lobbyist told me shortly after Lincoln’s floor speech. “It’ll be hard for her to walk back from this.” As of late last week, there was a very real chance she’d get her way. One derivatives industry lawyer I spoke with told me Democrats were so concerned about appearing to oppose the measure that it would become law unless the leadership stripped it out “behind closed doors.”
But then something unforeseen happened: Legendary Fed Chairman Paul Volcker, a hero to Wall Street reformers and scourge of megabanks, penned a letter to Banking Committee Chairman Chris Dodd proclaiming that the Lincoln approach overreached. Volcker was quite possibly the only person in America with the credibility to stop the Lincoln provision—similar pleas from the administration, the Fed, and the FDIC all seemed to fizzle in recent weeks—and it looks like his intervention is having the desired effect. But before the industry rushes to celebrate Paul Volcker as its savior, it should remember why it feared him in the first place.
Politically, opponents of the Lincoln provision faced two big hurdles. The first is that, over the last several weeks, the administration has made a p.r. push touting muscular derivatives regulation as non-negotiable. The president went so far as to say he’d veto a bill that didn’t go far enough on derivatives. With so much focus on the issue, the average Democratic senator wasn’t about to oppose a tough-looking measure even if it technically went further than the administration had advocated.
Beyond that, there was a basic rule of politics at work: It’s much harder to strip a reform measure out of a bill than to prevent it from getting there in the first place. Consider, for example, the fate of another effort to impose structural change on Wall Street—an amendment by senators Sherrod Brown of Ohio and Ted Kaufman of Delaware that would have shrunk the country’s biggest banks.
The idea behind the Brown-Kaufman amendment was that a handful of banks had grown so unwieldy that the government couldn’t credibly promise not to bail them out. The administration opposed the amendment because it believes bright-line rules are actually easier for banks to evade than the prying eyes of regulators. And because Treasury wants the flexibility to negotiate international agreements with other advanced economies and worries that such rules would gum up the process. But the administration had reason to worry as the broader reform bill wound its way to the Senate floor. Majority Whip Dick Durbin, the Senate’s second-ranking Democrat, signed on as a co-sponsor, while Majority Leader Harry Reid called the idea “intriguing” and eventually proclaimed his likely support. Every day, more senators seemed to offer their endorsement.
Yet, by the middle of last week, the amendment was losing altitude. Brown and Kaufman found themselves struggling to elbow their way onto the agenda for a vote. When they finally got it, the amendment garnered a mere 33 yeas. Dodd had let it be known he opposed the bill, and eleven of 13 Democrats on his Banking Committee followed his lead. Because any given senator could claim the amendment would have died even with his vote, no one faced blame for killing it.
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