Lincoln's Win Might Be Better for Wall Street

Last night, Senator Blanche Lincoln made fools of the pollsters and narrowly defeated her opponent Bill Halter. Everyone had assumed that if she lost, it would be the end of her controversial derivatives business spin-off position in financial reform. Now, they conversely assume that her win signifies that it may survive yet. It's hard to see how.

The question, then, is whether her win will cause her to fight harder to keep the proposal from getting killed in conference committee -- and also whether Democrats will hear her out. My colleague Josh Green thinks so:

It doesn't seem like a stretch to conclude that Lincoln eeked out a win by convincing just enough voters that she was a Wall Street scourge. If her signature provision goes down in flames, she'll look toothless and weak, and almost certainly lose her seat. The bank lobby and the Obama administration (both oppose the Lincoln provision) may simply prove too strong and do the deed anyway. But their task got a whole lot harder. The markup conference will now get a lot more attention. That could be tough for Lincoln. But it will be especially tough for Democrats who wanted to kill her provision without suffering any political damage.

Indeed, she definitely impressed some progressive voters with her crack down on Wall Street. But that's not who she needs to impress in the November election. She needs votes from moderates and conservatives.

At this point, polling indicate that Lincoln's Republican opponent John Boozman is up by 25 points. Sure, the polls were wrong last night, but that was only a 6-point fail. 25 points is a huge margin, and it's unthinkable that the polling could be that far off. Those 25 points aren't progressives -- they wouldn't dare vote for a Republican.

In fact, if the provision survives it could hurt her chances in courting moderates. Her Republican opponent will (or should) explain to voters that it went too far. He can say that it hurts American competitiveness in financial services, because all derivatives business will go to overseas banks. He can say that the derivatives business will be even riskier, because swaps won't have bank balance sheets behind them. Smaller, poorly capitalized firms will sell and trade derivatives instead. Are financial stability and the U.S. economy really better off?

Now progressives might not listen, because they likely believe that derivatives are simply evil instruments of greed. But moderates and conservatives aren't as likely to shrug off these criticisms. After all, virtually every major regulator -- from the Fed to the FDIC -- is against the provision, as is the White House and Treasury. Senate Banking Committee Chair Chris Dodd (D-CT) even introduced an amendment that would have essentially killed it if Republicans hadn't oddly balked.

So really, a lame-duck term might have led to Lincoln fighting even harder -- she then wouldn't have needed to worry about moderates or conservatives, and could have carried on her anti-Wall Street crusade to the bitter end. Now, however, she has to fear the real implications of her proposal getting passed.

And other Democrats worrying about midterms will face the same reality. They've already got the progressive votes. Most will hold their nose and vote Democrat no matter how financial reform turns out. Now, they need to worry more about the moderates. Cracking down on Wall Street might seem a nice populist approach to gather those votes up, but Democrats don't want to provide their opponents with compelling arguments that their bill took things too far and hurt the U.S. economy in the process. That's why the derivatives spin-off provision isn't necessarily a winning proposition for Democrats. There's nothing moderate about it.