Will Lincoln's Derivatives Desk Spin-Off Provision Survive?

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What's the most controversial provision in the Senate's financial reform bill? The answer is becoming increasingly obvious: Blanche Lincoln's (D-AR) provision which would require banks to separate their derivative desks into an affiliate or spin them off. Big names in Washington are lining up to oppose the measure, but it still remains a part of the broader financial reform effort in the Senate. Can it withstand the all this criticism, or will it eventually be eliminated?

Who's against this proposal? Opponents include the White House, FDIC Chairwoman Sheila Bair, Federal Reserve Chair Ben Bernanke, Former Fed Chair and financial reform advocate Paul Volcker, Senate Banking Committee Chairman Christopher Dodd, most (if not all) Republicans. In other words, virtually every significant Washington economic policymaker outside of Congress plus Republicans.

The actual effect the controversial provision would have on banks if enacted remains a little unclear. At first it was thought banks would have to spin off their derivatives businesses entirely. Last week, however Lincoln reinterpreted the language as saying that big financial firms would still be able to sell derivatives, but must do so in a separate affiliate from their depository bank. Banks still find this problematic, however. And some people still believe spin-off will be required unless the language is changed.

But today, Talking Points Memo reports that the seeming endurance of the spin-off language might just be a political ploy to help Lincoln in her primaries. It says:

But they may have gotten themselves stuck with it--at least for now. With their assent, the plan was authored by Sen. Blanche Lincoln (D-AR), who designed it to guard her left flank against a somewhat formidable primary challenge, and has been boasting of it on populist grounds for weeks. And that according to Republican and Democratic Senate sources, has led Democrats to quietly agree to postpone any changes they decide to make to her proposal until after this Tuesday's election has passed, to avoid embarrassing her in front of voters.

"I got a pretty good idea that it won't be dealt with before Tuesday," Sen. Bob Corker (R-TN) said last night, in response to a question from TPMDC.

This is now starting to add up. It would be very surprising to see the Senate ultimately allow this provision to survive, considering how vastly unpopular it is among even prominent Democratic policymakers. Still, they did vote down an amendment sponsored by Sen. Saxby Chambliss (R-GA) earlier this week that would have killed the provision.

If the spin-off section does make it into the final version, there's a chance Republicans will use it as their primary reason to vote against the financial reform bill. At this point, they're relatively content with the no-bailout language. They know they aren't going to win the consumer financial protection bureau battle. But since this derivatives provision is opposed by the White House and a range of other important experts across the political spectrum, it would be politically easy to use it as their crutch to filibuster.

Moreover, if Senate Republicans do somehow fail to stop the provision and the bill passes, the House might eliminate it during conference. The House bill's derivatives language isn't nearly as aggressive and contains no such spin-off provision.

One way or another, it looks pretty unlikely that banks will ultimately have to spin-off -- or even separate -- their derivatives business from their depository institution.

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Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.
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