Tough regulation of derivatives moved through Blanche Lincoln's Agriculture Committee with the surprising support of Republican Charles Grassley (R-Iowa) amid signs that the GOP is softening its opposition to financial regulatory reform.
Grassley's vote gives Democratic efforts at reforming Wall Street a crucial bipartisan sheen as they charge toward the Senate floor, but Grassley warned that he was no guaranteed yes vote for the final product. Last year, he played a role in health care negotiations before dropping out after claiming the bill could "pull the plug on Grandma."
On a conference call with Iowa reporters after the vote, Grassley said, "The Lincoln bill is an important step in the right direction."
"My vote today for this reform doesn't mean that I'll be able to support the larger financial reform bill on the Senate floor. The derivatives piece is significant but that larger bill has a number of flaws that need to be resolved before I support it."
Grassley's vote comes as Republicans seem to be warming to elements of the legislation. During the mark-up, Sen. Saxby Chambliss (R-Ga.), the ranking Republican on the committee, repeatedly praised Lincoln and said he largely agreed with what was in the package, but not enough to support it yet.
Lincoln hailed the bipartisan vote. "The Senate Agriculture Committee has taken a significant step toward bringing real reform to our nation's financial markets, providing the transparency and accountability that the American people deserve in a bipartisan way. My bill will bring the $600 trillion derivatives market out of the dark and into the light of day, ending the days of backroom deals and putting this money on Main Street where it belongs," Lincoln said in a statement after it passed.
Some Republicans still refer to the bill as a "permanent bailout" and Senate Minority Leader Mitch McConnell (R-Ky.), who led that charge last week, is not speaking warmly of bipartisanship.
But the irony of McConnell's stand, said Sen. Bob Corker (R-Tenn.), is that the GOP leader actually aided Treasury Secretary Tim Geithner in a debate with Sheila Bair, the head of the Federal Deposit Insurance Corporation. Bair had demanded that banks pay a fee to create a fund that would be used to break up and wind down failing firms so that taxpayers wouldn't be on the hook.
Geithner, said Corker, did not want a pre-fund, but wanted a post fund, so that the administration could also tax banks to recoup previous bailout losses. By making the $50 billion the focal point of his objection, McConnell is helping Geithner win that fight.
"The interesting thing about us picking the $50 billion bailout -- I'm not picking it, but us picking that $50 billion fund is, it plays right into the hands of the administration, because they don't want this $50 billion pre-fund. What they want to do is come right back around and tax the banks, and if there's a $50 billion pre-fund it keeps them from doing it," Corker told reporters. "This had been a fight between Sheila Bair and Tim Geithner from day one, that's what this has been about, and Geithner doesn't want the $50 billion because he wants an opportunity to tax the banks."
It's not "coherent" for Republicans to argue against the pre-fund, Corker said.
"At the end of the day, we need a way to resolve these firms. We need a way to wind them down. And whether you fund them up front or you fund it after the back, you're still doing exactly the same thing. It doesn't change anything. It doesn't change anything. But what it does do, it gives the administration an opportunity to say, 'Okay, no pre-fund, we'll do an $80 billion tax up front, which we want to do anyway.' I just -- I don't know where this takes us. To me it's not coherent," he said.
But, said one reporter, Banking Committee Chairman Chris Dodd (D-Conn.) had said that the pre-fund is a Republican idea.
"Sheila Bair is a Republican," Corker noted.
UPDATE: As Chris Bowers at OpenLeft notes, Lincoln's bill was tough -- too tough, in fact, for several Democrats who went to work watering it down.
Read the Agriculture Committee's summary of Lincoln's bill:
The Wall Street Transparency and Accountability Act of 2010
This is landmark reform legislation that will bring 100 percent transparency to an unregulated $600 trillion market, close all loopholes and keep jobs on Main Street. This will protect taxpayers, jobs, consumers and the global economy, and will go further than any other proposal to prevent future bailouts.
Historic Reform of the Derivatives Market
Brings 100 Percent Transparency to Market with Real-Time Price Reporting:
Wall Street will no longer be able to make excessive profits by operating in the dark. Exposing these markets to the light of day will put this money where it belongs - on Main Street. The public will see what is being traded, who is doing the trading and, most importantly, regulators can go after fraud, manipulation and excessive speculation.
Lowers Systemic Risk by Requiring Mandatory Trading and Clearing:
Trading and clearing of swaps lower risks and make the entire financial system safer. Transactions, determined by the regulator, will be required to clear through a clearinghouse. In addition, these transactions must be traded on a regulated exchange, which will provide further market transparency.
Prevents Future Bailouts and Addresses "Too Big to Fail":
Banks need to be kept in the business of banking. The taxpayer funds used to bail out AIG and other Wall Street firms will never be used for this purpose again. The Federal Reserve and FDIC will be prohibited from providing any federal funds to bail out Wall Street firms who engage in risky derivative deals.
Loopholes have allowed far too many to avoid the law of the land or set up shell companies to claim exemptions. This bill gives regulators the authority to close any loophole they find, protecting the markets, taxpayers and the economy.
Protects Jobs on Main Street:
The interests of Main Street will be protected. Commercial businesses and manufacturers who use these markets and customized contracts to manage risk will still be permitted to do so without imposing additional margin costs. This will protect American jobs and keep consumer costs low.
Protects Municipalities and Pensions:
Swaps dealers will have a "fiduciary duty," just like investment advisers, that will require the interests of municipalities and pension retirement funds be put first; ensuring Wall Street doesn't take advantage of Main Street and taxpayers.
Regulates Foreign Exchange Transactions:
Foreign exchange swaps will be regulated like all other Wall Street contracts. At $60 trillion, this is the second largest component of the swaps market and must be regulated.
Increases Enforcement Authority to Punish Bad Behavior:
Regulators will be given broad enforcement authority to punish bad actors that knowingly help clients defraud third parties or the public such as when Wall Street helped Greece use swaps to hide the true state of the country's finances.