Senate Agriculture Committee Chair Blanche Lincoln's (D-AR) aggressive derivatives bill passed committee yesterday and now awaits its merger with the chamber's broader financial reform bill. It contains a controversial measure which would forbid the use of federal funds to assist any financial institution on the brink of collapse due to derivatives gone bad. While this will probably have a great deal of populist appeal, it appears to be in direct conflict with both versions of financial reform floating around Congress and general market stabilization efforts.
Ties Regulators Hands in Some Financial Crises
Both the House and Senate bills call for resolution funds that regulators would use to wind down large financial firms. Those funds would cover the costs incurred during that process, so that taxpayers wouldn't be on the hook for another bail out. The FDIC would be in charge of that fund, yet the derivatives bill specifically forbids the FDIC from using its power to go towards the obligations of institutions that run into trouble due to derivatives. Isn't it conceivable, however, that money due to derivative counterparties is precisely the kind of cost these funds might need to be used for? If the end is to stabilize a financial panic, then calming the market could depend on alleviating the fear of a catastrophic domino of swap dealer failures.