Dodd Drops Plan To Scale Back Derivative Regulation

May 19, 2010 8:50 am

A far-reaching proposal to regulate derivative trading will not be scaled back in Wall Street reform legislation, at least for now, multiple Senate aides confirm. The development comes as welcome news to an unusual mix of progressives, financial officials, and at least one conservative Democrat: Sen. Blanche Lincoln (D-AR).

Lincoln is the author of the derivatives title in the Senate’s financial regulation bill, and for weeks has faced opposition from Wall Street, the White House, and members of her own party over a provision to force financial firms to spin off their derivatives trading desks into stand-alone entities.

The proposal to weaken the derivatives title was ultimately drafted by Senate Banking Committee Chairman Chris Dodd–the Democrats’ chief financial reform negotiator–and introduced yesterday at the eleventh hour of the debate over Wall Street reform. In it, Dodd proposed kicking the spin-off provision down the road for two years pending review by federal regulators, many of whom are already unfavorably disposed to it.But it met swift opposition from progressives, who are demanding stronger regulation; certain Wall Street officials, who hate the Lincoln plan itself, but prefer it for its predictability; and Lincoln herself, who continues to face a primary challenge, and has been guarding her left flank by running on her anti-Wall Street proposal.

It also faced a raft of negative press. But as soon as the trial balloon took flight, Lincoln’s opponent’s pounced, characterizing the populist proposal as an election-time ruse meant to dupe voters, and which was always going to be cast aside after primary season. And maybe it would have, if Lincoln’s election Tuesday night hadn’t ended in a draw, forcing a runoff between her and Arkansas Lieutenant Governor Bill Halter.

But just because Dodd’s plan is gone, it may not be forgotten. Though Dodd’s decision to drop it likely means financial regulatory reform will pass the Senate leaving Lincoln’s plan untouched, Democratic leaders will get one more bite at the apple when the House and Senate meet to iron out the differences between their two bills. The House’s derivatives title is significantly weaker than the Senate’s and, with the White House’s backing, party principals could meet in the middle, scrapping or punting on the spin-off provision as part of a convenient compromise.

But that would still buy Lincoln time (her runoff is on June 8) and would force top Democrats to explain why they scrapped the tough-on-Wall-Street plan behind closed doors.

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