Tuesday, April 13, 2010

Hurdle Emerges to Financial Revamp

Original posted in the WSJ by Damian Paletta:

White House officials have raised objections to a potential compromise between Democrats and Republicans on the Senate Agriculture Committee regarding rules governing derivatives trading, Senate aides said.

The pressure from the White House and Treasury Department could complicate the broader congressional effort to rework financial regulation, as it could derail a bipartisan deal.

It also signals the Obama administration's increasing effort to kill parts of the financial overhaul it opposes. The administration stepped in several weeks ago and warned Democrats not to offer too many concessions on another part of the bill that would create new consumer protections.

Word of the White House's objections sent shudders through Wall Street late Monday, with some bankers pleading with Senate aides to revive a deal. Many bankers had pinned hopes on a business-friendly derivatives deal emerging from the committee. Tighter restrictions could cost banks billions of dollars in trading revenue, according to analyst estimates.

It is unclear if the White House's objections will scuttle the deal or whether lawmakers on the Senate Agriculture Committee will vote to advance it anyway. The debate comes just weeks before the Senate is expected to vote on new regulations for financial markets.

The Senate Agriculture Committee proposal, spearheaded by panel chairman Blanche Lincoln (D., Ark.) and Saxby Chambliss (R., Ga.), was seen by many as one of the few parts of the bill that could attract bipartisan support. But White House and Treasury Department officials contend that the deal would not include enough restrictions on risky derivatives trades and that it would focus too much on simply increasing disclosures.

"We continue to work closely with the administration to put the best possible bill together," a spokeswoman for Ms. Lincoln said Monday. Mr. Chambliss said in an interview last week the bill would focus on "transparency" and wouldn't aim to put any company in its "cross hairs."

White House officials have pointed to the complicated derivatives problems that damaged American International Group Inc. and said there must be new rules to oversee derivatives trading. People familiar with the matter said a top concern with the potential deal in the Senate Agriculture Committee was that it could exempt too many types of companies from new trading requirements, though details weren't immediately available.

The White House and liberal groups have also raised concerns about the derivatives provision that passed in December as part of a broader bill in the House of Representatives, saying it also wouldn't do enough to limit risky derivatives trades.

Derivatives are a type of financial instrument that many types of companies use to hedge their risk, but derivatives have also emerged as a type of speculative financial product that make up a large portion of the trading volume at banks.

The Senate Banking Committee passed a bill in March that included tight restrictions on derivatives trading, and many companies have increased their lobbying in recent weeks to roll that proposal back. White House officials have expressed support for this measure and said they would fight any efforts to weaken it.

"We will oppose all attempts to create loopholes or carve-outs that undermine the basic goals of transparency and comprehensive oversight," Treasury Department Deputy Secretary Neal Wolin said Monday.

The Senate could begin voting on the new rules as soon as the week of April 26.

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