06/14/2010 05:12 am ET | Updated May 25, 2011

Democrats Hold The Line Against Wall Street Derivatives Lobbying

Senate Democrats are "resisting a last-ditch lobbying push from big Wall Street firms" and "moving toward a sweeping revamp of financial regulation that would squeeze banks' lucrative derivatives-trading business," the Wall Street Journal reported Wednesday.

Wall Street giants Goldman Sachs Group Inc., J.P. Morgan Chase & Co. and Morgan Stanley had been pressing hard in recent days to dilute provisions of the bill that would change the rules for derivatives trading. But the Obama administration, which has made this one of its priorities for the financial-regulatory bill, has pushed back hard and appears to be succeeding. That's drawing Republican complaints that the pending rewrite of the rules of finance will put the economy at risk.

The battle is the latest clash between Wall Street and the White House as the administration pushes for the most sweeping revamp of financial regulation since the Great Depression, following the recent crisis. Wall Street firms, among other interests, are scurrying to protect their franchises and profits.

Meanwhile, President Barack Obama planned to "turn up the pressure for an overhaul of Wall Street regulations" as he met with congressional leaders this morning, including the Democratic and Republican leaders of both the House and Senate.

The Senate is preparing to take up a sweeping overhaul of financial regulations regimen in less than two weeks. Republican leaders have already promised to reject broad changes proposed by Democrats.

On Tuesday, Sen. Blanche Lincoln (D-Ark.), a generally bank-friendly Democrat, burst the bubbles of Wall Street lobbyists when it became clear that she would support some tough derivatives reforms backed by the White House.

The Obama administration supports removing exemptions in the Senate reform bill for so-called "end users" of derivatives. End users are farmers, airlines, dairy producers or other companies that use derivatives as an integral part of their business, rather than as tools to manipulate the market or profit from speculation. The administration wants derivatives contracts to be traded on exchanges or centrally cleared. Banks are seeking exemptions for end users, however, as a loophole to keep the derivatives market in the dark, as it is currently. Brokers and swaps dealers have been pressuring end users to lobby Congress for an exemption.

"The idea that all end-users of derivatives somehow be absolved from having to clear their trades is something that we do not agree with," Treasury Department Deputy Secretary Neal Wolin said during a briefing with reporters last week, "and we will fight hard to oppose."

On Tuesday, Treasury Secretary Tim Geithner joined in, calling for all derivatives to be cleared transparently on an exchange.

Bank lobbyists have been fighting hard against derivatives reform amid speculation that Wall Street will offer the proposed Consumer Financial Protection Agency to Democrats as a concession for loose rules on derivatives.

On Wednesday, the Wall Street Journal's Peter Eavis editorialized in favor of derivatives reform, arguing that the "benefits of enacting tough new rules outweigh any drawbacks."

U.S. banks have $275 trillion of notional exposure to derivatives that don't trade on exchanges. The main risk posed by this gigantic pool is the hidden leverage. Put simply, a bank may have a large derivatives position but avoid posting cash upfront with its trading partner as others do.

This "under-collateralization" makes the system prone to runs because, when instability arrives, all banks rush to collect what they are owed on derivatives--and try to delay paying out what they themselves owe. Witness the Lehman Brothers collapse. And the numbers aren't small.

Wall Street has been targeting the Agriculture Committee. "I always get lobbied by anybody who has an interest in whatever the issue may be. And there's been no shortage of folks expressing their opinion about this issue," said Sen. Saxby Chambliss (R-Ga.), the committee's ranking Republican.

"We've been continuing to work with Senator Chambliss and working to find that common ground and figure out where we can be," Lincoln told reporters on her way into a meeting with the Democratic caucus.

The administration is backing Lincoln in a contested primary against progressive challenger Bill Halter, who has the backing of organized labor.

The Agriculture Committee has some jurisdiction over derivatives because they began as simple financial products for farmers -- corn or pork belly futures, for instance -- but have evolved into a roughly $600 trillion market that runs largely unregulated.

The Banking Committee, chaired by Sen. Chris Dodd (D-Conn.), had taken the lead, however, on writing derivatives legislation, though Lincoln's entry into the debate complicates matters.

"We'll dovetail [the two bills] when it comes to the floor," said Lincoln, saying she wanted to move legislation through her committee "soon."

Jim Collura, a lobbyist with the New England Fuel Institute and a lead organizer behind the pro-reform Commodity Markets Oversight Coalition, was briefed Tuesday night by committee staff on Lincoln's proposal. He told HuffPost that he and his coalition allies were greatly encouraged by the shift in Lincoln's direction, but were waiting to see final legislative language before putting out an official statement.

His coalition has been fighting against allowing any exemptions when it comes to derivatives regulation, but Collura said that they were resigned to the fact that there will be at least some carve outs.

"There will be [end-user exemptions]. That's pretty much a foregone conclusion. That's the reality. It'll have to have one for any member of Congress to support it," he said.

The fight now, he said, was over how wide to make those exemptions. Lincoln, he said, is leaning toward making the exemptions very narrow and limited to "bona fide commercial interests" that are directly related to the company's business model. "That seems to be the direction she's moving," he said.

Banks have been pushing for a "balance sheet exemption" -- a massive loophole that would exempt any derivatives trading that was connected to the company's balance sheet, which would essentially cover any trading at all. Collura said that Lincoln's approach would not allow such exemptions.

Lincoln outlined her proposal in a letter to Sens. Maria Cantwell (D-Wash.), Dianne Feinstein (D-Calif.), Byron Dorgan (D-N.D.) and Olympia Snowe (R-Maine) that responded to concerns they had raised earlier.

Cantwell, an advocate of strong reform, was pleased. "Senator Lincoln has come out with the strongest proposal to date of any of the committee chairs working on financial regulatory reform," she said after receiving the letter. "As the daughter of a farmer, she knows the difference between farmers legitimately hedging and Wall Street speculators cooking up toxic assets. It looks to me as though Sen. Lincoln is proposing a real stare down of Wall Street."

Read the letter here.

Lincoln is framing her proposal as reaching further than anything the White House has proposed. "The financial regulatory reform legislation that I am poised to introduce this week is historic reform. I have been working closely with Ranking Member Chambliss, the Administration, and other Senate Democrats and Republicans to craft this legislation and my proposal is reflective of those conversations," said Lincoln in a statement. "It will include strong mandatory trading and clearing requirements as well as real-time price reporting that will bring 100% transparency and accountability to Wall Street. My bill will vigorously reform unregulated markets, close all loopholes, and protect jobs on Main Street. Proposals that I have seen from the Administration have not gone far enough to prevent bail outs of 'too big to fail institutions' and could contain loopholes. If we pass reform, it needs to be real reform. My proposal will go further than any other Congressional or Administration proposal to prevent future bailouts."