House, Senate Differ Over Regulations On Derivatives

The financial regulatory bill headed for a House-Senate conference would set up federal oversight of the controversial derivatives market. It requires most derivatives be vetted through clearinghouses. The Senate bill would require banks to spin off their derivatives business.

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We've been hearing about the debate over new rules for the financial industry for months. Now it's in the final stages, when some crucial changes could still take place. Next week, House and Senate lawmakers meet to reconcile their different versions of the bill. One important difference: how to regulate those complex financial products known as derivatives. NPR's Audie Cornish looks at the fault lines in the last of our three reports on the bills.

AUDIE CORNISH: Derivatives are contracts, similar to bets or insurance, that investors use to protect against unexpected changes in the price of things, like oil or interest rates. Some of the marquee names of the financial crisis, from Lehman Brothers to AIG, suffered in part because of their entanglements with derivatives.

So the derivatives market was a ripe target for lawmakers to show they're standing strong against Wall Street.

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CORNISH: Lawmakers like Senate Democrat Blanche Lincoln, who is in a tight race for reelection. Lincoln helped write one of the most controversial parts of the Senate financial overhaul bill. It's a provision calling for commercial banks to spin off their derivatives trading desks or give up their access to deposit insurance or loans from the Federal Reserve.

Speaking from her campaign bus on a trip back to Little Rock, Lincoln said she would defend the provision against efforts to remove it in conference.

Senator BLANCHE LINCOLN (Democrat, Arkansas): I had a guy tell me the other day, he said that's strong as 10 miles of garlic. Maybe this is strong, but I think that's what people in this country want. They want to see some leadership and legislation that's not only going to prevent us from seeing the same kind of financial crisis that we've just experienced, but they want to see some real leadership.

CORNISH: It's not so clear, however, that this particular provision will make it into the final legislation. Democrats have refrained from criticizing it directly during Lincoln's campaign push, but White House officials have not endorsed it and even House Financial Services Chairman Barney Frank has suggested the provision goes too far.

Senator JUDD GREGG (Republican, New Hampshire): I mean, I think Barney Frank must have woken up in the morning and been in shock to find out that the Senate bill was to the left of him.

CORNISH: That's New Hampshire Republican Judd Gregg. He's one of the GOP senators on the conference committee.

Sen. GREGG: There's no partisan fight there. It's just let's get the language right. And the language which is in the Senate bill is wrong. It's just plain wrong. It's going to cause significant contraction in the credit markets and it's going to make the derivatives markets less stable, less sound.

CORNISH: Top banking regulators have expressed concerns that the provision could lead banks to move their derivatives trades further off the radar rather than give up profits.

Even supporters of the Lincoln measure say it's not mandatory to the reform effort. Lynn Stout is a securities law professor at UCLA.

Professor LYNN STOUT (UCLA): It might have not have completely prevented the crisis, but it certainly might have reduced its size and kept the magnitude a little bit more under control. But there are other provisions in the bill, especially the provision that requires that derivatives be traded on clearing houses or exchanges, that are probably much closer to addressing the heart of the problem.

CORNISH: Indeed, there is some agreement between the House and Senate bills. Both bills require that derivatives be put through clearing houses, where the parties involved would have to show they have the capital to back up their bets.

Audie Cornish, NPR News, the Capitol.

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