Dire warnings & derivatives mark first day of Senate financial reform debate

By Jon H. Harsch

© Copyright Agri-Pulse Communications, Inc.

Washington, April 29 – Thursday afternoon’s opening round of a likely week-long debate on the Wall Street reform bill showed how very far apart the bill’s supporters and critics are. That’s despite the virtual certainty that the final bill will be passed with strong Republican support as well as perhaps unanimous support from Democrats.

Calling for a debate that is “as factual as it is fierce,” Senate Banking Committee Chris Dodd (D-CT) opened the financial reform debate by saying that “I think it is incumbent that we at least try to understand each other’s motives, not question them. . . When I said that I want members to be able to offer their amendments, to be able to debate those amendments, and have votes on those amendments, I mean it.”

What followed showed little evidence of the understanding Dodd called for. In a lengthy opening statement, Senate Banking Committee Ranking Member Richard Shelby (R-AL) said that he and Dodd share the goal of crafting a final bill which “ends bailouts, protects consumers without jeopardizing our small community banks, and brings transparency to the world of derivatives without sacrificing economic growth and job creation.” Then Shelby went into the many ways that he and Dodd differ on how to achieve their shared objectives.

Shelby promised to “seek to remove dozens of provisions that unnecessarily expand the reach of the federal government into the private affairs of Americans and potentially endanger our civil liberties.” As an example of problems with the Dodd bill, Shelby said that “If an orthodontist from Mobile fears regulatory burdens because she offers installment payments, I listen.” That one-liner highlighted a sharp disagreement with Dodd who’d answered the orthodontist issue yesterday, rejecting “the Wall Street lobbyist claim that somehow the new consumer financial protection bureau would bring new regulation to orthodontists and others who simply allow customers to pay over time.” Citing Section 1027 of his Wall Street reform bill, Dodd explained that “the bill specifically excludes merchants, retailers, or others ‘not engaged significantly in offering or providing consumer financial products or services.’”

Next, Shelby said that firms like Goldman Sachs and Citigroup support the bill because “they know that the bill will bring them and Wall Street firms like them under the federal safety-net where they will get preferential treatment just like Goldman Sachs got in the AIG bailout. . . the bill as written will guarantee that Goldman Sachs could again be paid 100 cents on the dollar if its bets go bad.  That is a huge benefit for Wall Street firms at the expense of others. . . this bill will help the big banks get bigger, and further tilt the competitive playing field against small and less politically connected firms.”

Shelby warned further that “this bill also threatens our economy by its treatment of derivatives. . . it raises costs of risk management and threatens the abilities of companies to manage risk using derivatives.” He said that while he supports greater transparency for derivatives trading, “this bill, under the guise of promoting transparency, threatens

Main Street
companies and their customers for no good reason. The end-user exemptions put
Main Street
companies through almost endless and unworkable hoops that will ensure higher costs, lower growth, fewer jobs, and diminished economic opportunity.” He added that “this bill will shift derivative trades offshore to places where we have no oversight or regulatory abilities to act.”

As Chair of the Senate Agriculture Committee which has jurisdiction over derivatives trading, Sen. Blanche Lincoln (D-AR) responded directly to Shelby’s concerns over derivatives. She pointed out that the derivatives provisions in the Wall Street reform bill passed her committee with support from Sen. Chuck Grassley (R-IA).

Lincoln said she looks forward to incorporating amendments to improve the bill but insisted that “America’s consumers and businesses deserve strong reform.” She said the bill’s derivatives provisions as currently drafted “will lower system-wide risk through clearing, exchange trading and real-time price transparency. It will close loopholes and make sure that the regulators have the full authority to go after those entities that would evade or abuse the law. It protects jobs on

Main Street
by giving true commercial end users the ability to hedge and manage their risks. It protects municipalities, pensions, and any governmental agency from gouging and gross profiteering. And, most importantly, it will bring 100% transparency to what is currently a completely unregulated, dark market.”

To read specific warnings from Sen. Saxby Chambliss (R-GA) about the bill’s derivatives provisions, go to: www.agri-pulse.com/20100429H4.asp

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