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Controversial Budget Bill Would Roll Back Dodd-Frank Provision
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Controversial Budget Bill Would Roll Back Dodd-Frank Provision

Economy

Controversial Budget Bill Would Roll Back Dodd-Frank Provision

Controversial Budget Bill Would Roll Back Dodd-Frank Provision
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The House is expected to vote Thursday on a spending bill designed to avert another government shutdown. Among the controversies: a rollback of the Dodd-Frank financial market regulatory overhaul. Banks have lobbied to get rid of a provision requiring them to "push out" derivatives trading.

AUDIE CORNISH, HOST:

As Ailsa just said, one of the most controversial parts of that government funding bill is a proposal to roll back a provision of the Dodd-Frank financial reform law. The change involves banks and the trading of derivatives. NPR's John Ydstie joins us in the studio to explain all this. Hi, there, John.

JOHN YDSTIE, BYLINE: Hi, Audie.

CORNISH: So first of all, remind us what derivatives are.

YDSTIE: Well, derivatives are transactions that allow you to bet on the future price of a commodity or the direction of interest rates or the value of other financial instruments. For instance, airlines use derivatives to protect themselves against fluctuations in the price of jet fuel. Banks use the transactions to protect themselves from fluctuations in interest rates. Of course, derivatives also include things like the mortgage-backed securities and credit default swaps that brought Wall Street to its knees and fueled the financial crisis. So after the financial crisis, the Dodd-Frank reform bill included provisions that prohibited banks with government backing like FDIC insurance from engaging in transactions involving the riskiest of these derivatives, like credit default swaps, because if things went bad, taxpayers would once again be on the hook to bail them out.

CORNISH: So this rollback - this proposed rollback in the legislation we see now - how would it change that?

YDSTIE: Well, under Dodd-Frank, those risky transactions were to be pushed out into affiliates of the banks that didn't have any government safety net. The banks hate this provision. They say it's too complex and unworkable, and they've been lobbying to repeal it. And they managed to get language that does that into this bill.

CORNISH: And that's led to Sen. Elizabeth Warren being at the forefront of leading opposition to it. Is that right?

YDSTIE: Right. She said on the floor of the Senate yesterday that repealing the so-called push-out rule would allow Wall Street to gamble with taxpayers' money once again and, if something went wrong, get bailed out by the government again. But there are some Democrats and prominent reformers, like Federal Reserve Chairman - former Federal Reserve chairman Paul Volcker, who have actually supported the rollback.

CORNISH: So help us understand. I mean, what's the argument made by Volcker and that group?

YDSTIE: Well, they agree with the banks that the push-out rule does complicate the regulatory framework. And they say another provision of Dodd-Frank, called the Volcker Rule, largely takes care of the problem. It prohibits banks from using federally insured deposits to make investments for the banks own proprietary accounts. And that would include derivatives like credit default swaps. They also say pushing these transactions out of the banks means they would be less regulated.

CORNISH: Meanwhile, they're pairing this with this huge omnibus bill, with the government shutdown threat looming. It seems bound to create a serious pushback, right?

YDSTIE: Well, you're right. And actually, former congressman Barney Frank, one of the main authors of Dodd-Frank, made that point. In the past, he supported changing this derivatives rule. But putting an issue as complex as this into a huge spending bill is a huge mistake, he says. He says it would be a frightening president - precedent - and be a roadmap for others who want to repeal financial protections.

CORNISH: So let me map out the players here. Democrats negotiated this deal along with Republican congressional leaders and the White House. And the White House has said the president would likely sign it. So we've got Democrats here taking opposite positions on this bill?

YDSTIE: Absolutely. What you've got here is a split between centrist Democrats and populists like Sen. Warren. Until very recently, Democratic leaders said that they were comfortable with this deal and that, in fact, they got some additional funding for financial regulators in it. But now it looks like there may not be enough votes to pass it.

CORNISH: That's NPR's John Ydstie. John, thanks so much.

YDSTIE: You're welcome.

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