Sen. Lincoln On Financial Overhaul Bill
GUY RAZ, host:
This is ALL THINGS CONSIDERED from NPR News. I'm Guy Raz.
Wall Street may be in for some big changes. The financial overhaul bill that's set to become law will vastly expand the government's authority over what banks can and cannot do.
The idea is to prevent another 2008-style economic collapse. Now, one analyst has already predicted that the impact on JP Morgan alone could result in a 14 percent drop in its annual revenues.
This morning, President Obama promised the bill...
President BARACK OBAMA: Will end the days of taxpayer-funded bailouts and help make sure Main Street is never again held responsible for Wall Street's mistakes.
RAZ: The bill will affect the way mortgages are sold, how credit card companies charge businesses and consumers, and the way banks can invest.
Arkansas Senator Blanche Lincoln, a Democrat, was trying to restrict banks from trading in derivatives, the kinds of risky trades that many argue contributed to the housing crisis. In the end, under intense pressure from New York Democrats and the White House, Lincoln agreed to a compromise.
Senator BLANCHE LINCOLN (Democrat, Arkansas): What we're going to see here is the fact that we provide a greater stability in the marketplace, because we've put into place mandatory clearing and mandatory exchange trading. Anything that can be cleared or exchange traded must be. And if it's not, then it's going to require greater capitalization and greater regulation.
RAZ: Senator Lincoln, obviously, you wanted to prohibit banks from all derivatives trading. You weren't successful in that. So do you feel that what came out is strong enough, at least for you?
Sen. LINCOLN: I do. You know, it's not everything that I would have done and I think that was clear by what I started with in the Ag Committee. I was successful in the Ag Committee in being able to move that forward and actually being able to keep it and maintain it in the Senate bill.
But our objective was to ensure that banks would get back to being banks. And if we look at where banks were, say, you know, 10, 15 years ago and what was actually permissible in terms of banking activity. Permissible banking activity, swaps and derivatives were not a part of that.
And so, what we were trying to do was to move out the riskiest of business, and I think we did accomplish that. We still allow banks to do some of those swap dealings. We certainly are going to allow banks, as an institution, to be able to participate in risk management if they need to manage risks or manage risks for their customers. But the idea of them being the actual dealer, using the instrument as a market maker was something that I had great concern about.
And so, what we still have been able to do is to maintain that the riskiest of that business is going to be pushed out into an affiliate and that banks will still be able to deal with the things that have always been permissible for banks, but not the things that has not been permissible like energy and minerals trading.
RAZ: Will it stop Wall Street's speculation in derivatives?
Sen. LINCOLN: I hope so. And I think it will. As I said, I put forward what I thought was probably the best way to do that, and that was to ask banks and financial institutions to move their swap dealings outside the bank. What we've been able to accomplish is to ensure that they are now required to move the riskiest of all that business outside of their banks into an affiliate and will still be allowed to do swaps or derivatives in financial dealings that have traditionally been permissible for banks.
You know, I think it is. I think it's going to be a good bill. I think it's going to do what we want it to do. It's going to require a greater responsibility from Wall Street and from these swap dealers to be able to be transparent, to be responsible. It's going to take away their ability in these riskiest of products to be able to access, you know, a bailout from government or from depositors.
RAZ: I wonder how much of an impact this overhaul will have. I mean, it still leaves the financial industry largely intact. As you know, it's an industry dominated by about six companies and it doesn't necessarily solve the so-called too big to fail problem.
Sen. LINCOLN: I think it's going to have a tremendous impact. I think the fact that these individual institutions that you're talking about, financial institutions that are there, and you're right, that are predominantly responsible for the majority of all of these risky financial tools - both derivatives and others - are, you know, now are going to have to be fully transparent.
They are going to have to have full reporting. They're going to have to clear a tremendous number of these transactions that are going to have to be both cleared or exchange traded, which we know is going to have a good, positive impact on eliminating systemic risk in our financial system. And I think it's going to be a great opportunity for us to put our economy back on track and to give consumers and investors greater confidence in the marketplace and in financial institutions.
RAZ: Up until the late 1990s, there was a law that separated commercial and investment banking. It was known as the Glass-Steagall Act.
Sen. LINCOLN: Mm-hmm.
RAZ: That, of course, was not restored in this legislation. Was that a mistake?
Sen. LINCOLN: I just think that it's going to be important for us to see the differences in those and to require them to behave differently. And I think that we're going to see a lot of that in what we're doing here. You know, again, I would like to have seen walling off that activity from banks and I tried very hard.
And at the end of the day, you know, there were a lot of people that disagreed with the very clear and distinct attempts that I was making. But I felt like I got an awful lot. And I'm proud of the direction that we're going and I feel like that it's going to be very beneficial to the people of this country and to the global economy at large in being able to do that. One hundred percent transparency in real-time reporting, I think people underestimate that was a part of what was in our bill.
People wanted to always talk about the derivatives. But when you talk about 100 percent transparency in real-time reporting, mandatory clearing and exchange trading. You talk about fiduciary duties and standards that need to be met for these types of swap dealers, we require that of brokers and dealers in the exchange in the stocks. We require, goodness, complete responsibility on board directors of banks. We need to make sure that these individuals are held accountable as well.
RAZ: And does it prevent the possibility of future bailouts by taxpayers?
Sen. LINCOLN: Yes, I think so. I do. If we wanted to be fully reassured that that was going to happen, we could have walled them off completely, which is what I would have loved to have done. But I think that the riskiest of business has come out of the banks now.
RAZ: That's Blanche Lincoln, a Democrat from Arkansas and the chairman of the Senate Agricultural Committee. She spoke to me from Pine Bluff, Arkansas.
Senator Lincoln, thank you so much.
Sen. LINCOLN: Thank you. I appreciate being with you.