Lincoln Open to Selling Out on Derivatives, She Says

As if we needed another reason to elect Bill Halter.

NEW YORK (Reuters) -Democratic Senators Chris Dodd and Blanche Lincoln said there was room to negotiate on a proposal that would force banks to spin off their swaps businesses, the Financial Times reported on Sunday.

Lincoln, chairman of the Senate Agriculture Committee, said she defended the policy, but was open to better ideas and suggestions.

"Better ideas and suggestions"? God FORBID this woman gets over 50% tomorrow.

Not that I have a problem with suggestions, but we all know what is going to happen to her provision: it's going to be watered down. Derivatives caused the AIG collapse. Warren Buffet called them "financial weapons of mass destruction" that posed a "mega-catastrophic risk" to the economy. Robert Reich says this provision is the "biggest battle in bank reform."

We do NOT need another sellout on derivatives regulation.

Here is the provision:

SEC. 716. PROHIBITION AGAINST FEDERAL GOVERNMENT BAILOUTS OF SWAPS ENTITIES.
(a) PROHIBITION ON FEDERAL ASSISTANCE.—Notwithstanding any other provision of law (including regulations), no Federal assistance may be provided to any swaps entity with respect to any swap, security-based swap, or other activity of the swaps entity.

The shameless bankers want to trade risky derivatives and STILL get bailed out.

Not our problem.

In addition to the statements of support by Joseph Stiglitz, Robert Reich, Nouriel Roubini, and Americans for Financial Reform, I have also learned of two other prominent economists who have endorsed this provision. In a letter just released today, Dean Baker and Jamie Galbraith write:

The undersigned members of the Economists' Committee for Stable, Accountable, Fair and Efficient Financial Reform (S.A.F.E.R) strongly support the passage of the derivatives and swaps regulation sections of the Senate Financial Reform Bill and especially Section 716 ("Prohibition Against Federal Bailouts of Swaps Entities"). If the Senate fails to pass strict regulatory oversight over dangerous over-the-counter derivatives and swaps, then the U.S. economy will continue to be vulnerable to significant financial risks.

Although the White House, Fed Chair Bernanke, Republican FDIC Chief Sheila Blair, and even Paul Volcker have opposed the provision, their arguments are refuted by the economists writing in favor. It's a classic case of the establishment economists versus the progressive economists.

In the opinion carrying the most weight for the establishment, Volcker writes that:

In that connection, I am also aware of, and share, the concerns about the extensive reach of Lincoln's proposed amendment. The provision of derivatives by commercial banks to their customers in the usual course of a banking relationship should not be prohibited.

Baker, Galbraith, et al. reply:

These assertions are questionable. First, if banks' roles in selling derivatives is crucial and part of the usual course of a banking relationship, why is it that only five banks - J.P. Morgan Chase, Citibank, Bank of America, Goldman Sachs and Morgan Stanley - account for 90 percent of the market?

...

Second, separating swap dealing operations from the business of banking does not mean that banks will be unable to hedge their banking risks. They will become end users, and, as will be true of almost all other end users, they will use the exchange traded futures market to hedge risk.

In other words, if it is so important for banks to trade derivatives, then why are only the TOP FIVE banks monopolizing the practice? It doesn't make any sense, but don't think that will stop them from killing this provision. The primary is tomorrow and they may cave soon.

I strongly urge everyone to CALL Banking Committee Chairman Dodd:

Christopher J. Dodd Chairman  (D-CT) [phone]

And the rest of the banking committee:

Richard C. Shelby Ranking Member (R-AL) [phone]
Tim Johnson (D-SD) [phone]
Robert F. Bennett (R-UT) [phone]
Jack Reed (D-RI) [phone]
Jim Bunning (R-KY) [phone]
Charles E. Schumer (D-NY) [phone]
Mike Crapo (R-ID) [phone]
Evan Bayh (D-IN) [phone]
Bob Corker (R-TN) [phone]
Robert Menendez (D-NJ) [phone]
Jim DeMint (R-SC) [phone]
Daniel K. Akaka (D-HI) [phone]
David Vitter (R-LA) [phone]
Sherrod Brown (D-OH) [phone]
Mike Johanns (R-NE) [phone]
Jon Tester (D-MT) [phone]
Kay Bailey Hutchison (R-TX) [phone]
Herb Kohl (D-WI) [phone]
Judd Gregg (R-NH) [phone]
Mark Warner (D-VA) [phone]
Jeff Merkley (D-OR) [phone]
Michael Bennet (D-CO) [phone]

And Blanche Lincoln herself:

Lincoln, Blanche L.  - (D - AR) [phone]

I am going to make 24 calls tomorrow to all these people and say:

I'm calling about the main Wall Street reform bill, S. 3217. Please retain the Lincoln provision of the substitute amendment for that bill, Section 716, on prohibiting federal bailouts of swaps entities.

Companies trading in derivatives were a big source of the financial crisis and need to be reined in. The Lincoln provision has been endorsed by several former administration members and respected economists, even if it is being fought by the Fed and other agencies. Please stop the abuse of derivatives trading by banks.

I ask that Senator X speak to Committee Chairman Dodd and demand that Lincoln's provision be retained because we need strong regulations.

PLEASE call Chairman Dodd, everyone on the banking committee, and Blanche Lincoln tomorrow. You can use this text or make your own. Remember that Lincoln's primary is tomorrow and after that the pressure is off!