But the bankers' efforts appear to be faltering in the face of strong pressure on key congressional Democrats from the Obama administration. That's drawing Republican complaints that the pending rewrite of the rules of finance will put the economy at risk.
The battle is the latest clash between Wall Street and the White House as the administration pushes for the most sweeping revamp of financial regulation since the Great Depression, following the recent crisis. Wall Street firms, among other interests, are scurrying to protect their franchises and profits.
Derivatives are financial instruments that derive their value from the movement of something else—for instance, the price of wheat or other commodities, or the level of interest rates. In recent years, a strain of derivatives known as credit-default swaps (in effect, a bet on a borrower's ability to repay a debt) has exploded. Derivatives figured in the global financial crisis, though their precise role is a subject of debate.
The bankers' lobbying has focused on the Senate Agriculture Committee, which Wall Street hoped would produce a friendlier bill than an alternative from the Senate Banking Committee. But it became clear Tuesday that the Agriculture Committee's chairman, Arkansas Democrat Blanche Lincoln, is now expected to introduce a bill with provisions that bankers oppose and the White House supports.
In the past few days, officials from Goldman's New York headquarters came to Washington to meet with the Agriculture Committee staff. A prominent J.P. Morgan official, Blythe Masters, a frequent contributor to Democrat campaigns, has both testified in public and met privately with the panel's aides. Earlier this year, J.P. Morgan hosted Sen. Lincoln in New York where she met with senior executives. The bank's political action committee contributed $5,500 on Jan. 14 to her reelection campaign.
Trading in derivatives is concentrated in five large Wall Street banks—J.P. Morgan, Goldman, Morgan Stanley, Bank of America Corp. and Citigroup Inc. The business produced revenues of about $20 billion last year, according to Comptroller of the Currency and industry estimates.
Unlike stocks and bonds, which are traded in public, most derivative deals are private agreements between two parties. Goldman, J.P. Morgan and Morgan Stanley have at least one common objective: To thwart or dilute proposals that would push trading in most derivatives onto exchanges or to "clearinghouses," which are middleman institutions set up to handle big transactions between banks.
heir main concern: Trading on exchanges or via clearinghouses could reveal more details about the pricing and structure of the deals, potentially benefiting rivals and clients, and in the process eating into profits. Banks have also argued that any requirements that their customers use standardized derivative products, instead of individually customized deals, would limit customers' flexibility.
Spokesmen for Morgan Stanley and Goldman Sachs declined to comment on lobbying efforts.
"Watering down and delaying reform can have a major benefit for" the banks, says Robert Litan, an economist and former Clinton administration antitrust official who now follows financial regulatory matters at the Kauffman Foundation, a nonprofit research group focused on entrepreneurship in Kansas City.
One advantage of using clearinghouses is that they can reduce risk to the overall financial system. Because they are usually backed by a group of Wall Street firms, if any one firm were to fail, the clearinghouse would remain able to make good its promises.
The outcome of the financial regulatory bill, of which derivatives are a big part, largely depends now on Senate Republicans. The House passed a version late last year, including provisions on derivatives closer to Wall Street's position than the White House's. The Senate is expected to turn to its version at the end of this month.
Derivatives woes played a significant role in the failure of some financial firms, including American International Group Inc., which provided guarantees it couldn't meet when the financial system unraveled in 2008.
On the high-stakes derivatives fight, the big banks have a substantial army of allies—the large numbers of industrial companies that use derivatives to hedge against everything from swings in interest rates and currency values to the price of wheat and oil.
Officials from dozens of these companies, often called "end-users," plan to come to Washington next week to press their case.
Democrats need at least a few Republican votes in the Senate to overcome the potential of a filibuster.
Talks between Republicans and bankers have intensified. Senate Minority Leader Mitch McConnell, a Kentucky Republican, went to New York last week for several fund raisers and met with the Association of Mortgage Investors.
On Tuesday, as it became clear that Sen. Lincoln wasn't moving toward Republicans on the derivatives issue, Sen. McConnell took to the Senate floor and blasted the Democrats. "We must not pass the financial-reform bill that's about to hit the floor,' he said. "The fact is, this bill wouldn't solve the problems that led to the financial crisis. It would make them worse."
President Barack Obama is to meet Wednesday with congressional leaders of both parties to press his case for passing a bill, including the new rules for derivatives.