Posted on 19 May 2010
According to the note scribbled at the top of the first page, Amendment 4110 arrived Tuesday at 11:57 a.m., three minutes shy of the deadline for lawmakers still hoping to alter the massive financial overhaul bill before the Senate.
It was only five pages and carried a lone, handwritten signature: Chris Dodd.
Without announcement or fanfare, the Connecticut Democrat -- chairman of the Senate banking committee and chief architect of the pending legislation -- was quietly trying to resolve one of the few remaining disputes that could impede the passage of the landmark bill: a disagreement over financial instruments called derivatives that has sent shudders through Wall Street.
At issue was a single section a third of the way through the massive 1,400-page bill that could force a handful of the nation's biggest banks to spin off their billion-dollar businesses in trading derivatives.
Dodd offered a clever Washington solution aimed to appease both friends and foes of the provision. His amendment preserves the tough language -- but it postpones any action for two years so it can be studied. And it assigns that study to a new council of regulators, headed by Treasury Secretary Timothy F. Geithner, whose members have serious reservations about such a dramatic measure and may very well kill it in the end.
Problem is, the idea didn't sit so well with Sen. Blanche Lincoln (D-Ark.), chief advocate of the derivatives ban, who was in Arkansas on Tuesday fighting for her Senate seat in a primary election. (Her bid to secure the nomination fell short, setting up a June 8 runoff election.) When contacted about Dodd's proposal, staff members seemed unaware of it. They later sent out a statement on Lincoln's behalf.
"I remain fully committed to my provision and will fight efforts to weaken it," she said. "I'm proud of the support my provision has received both inside and outside the Senate and will defend it should there be a debate on the Senate floor."
Nor did the banks cheer Dodd's compromise.
"It's immediately going to have a chilling effect," said one banking lobbyist, who spoke on the condition of anonymity to speak more freely. "Markets crave certainty. All this does is introduce a comic amount of uncertainty."
That uncertainty has been magnified by Dodd's last-minute stratagem, and by the mystery surrounding it. The year-long debate over how to overhaul the nation's financial regulations and avoid another economic crisis has taken place very much in public, especially during recent, marathon hours of Senate speechifying, but few knew Tuesday afternoon about Dodd's amendment. Press staffers at the Senate banking and agriculture committees, which share oversight of derivatives, said they did not know the details.
With anti-Wall Street fervor running high, the agriculture committee, which Lincoln chairs, approved her bill this spring barring banks that deal in swaps, a type of derivative, from tapping into federal aid programs -- effectively forcing the firms to shed their derivatives business. That bill later became part of the wider financial legislation now under debate and has so far remained there, despite stiff opposition from the Obama administration, regulators, some lawmakers and the nation's biggest banks.
Bank executives have warned about the consequences of barring derivatives trading at their firms, saying it would prevent them from serving customers and from hedging their own risks. Regulators and administration officials, meanwhile, have said the prohibition could drive the business into the shadows, precisely what Dodd's legislation is trying to prevent.
Lincoln has remained adamant, arguing that banks should be "in the business of banking" and rejecting the notion that her measure would harm U.S. competitiveness or lead to less regulation of the derivatives market, valued at half a quadrillion dollars.
Derivatives are financial contracts whose price depends on the value of a separate asset, such as a stock or bond. Derivatives have been traded on Wall Street for decades, but they exploded in popularity over the past decade with the help of big banks, which reaped a windfall in fees for their services. Trading in derivatives exacerbated the recent financial crisis, inviting heightened scrutiny from lawmakers and regulators.
Dodd so far has successfully steered his bill past objections from many Republicans as well as demands from the left wing of his own Democratic Party. But the dispute over derivatives has continued to bedevil the legislation even as it has otherwise gained momentum, heading toward what lawmakers in both parties predict will be its passage in a few more days.
Under Dodd's amendment, Lincoln's provision would not be implemented for two years.
In the interim, the provision would be studied by a federal council of regulators, such as the leaders of the Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency. Several key members of the council and Geithner, who would have final say under the compromise if he were still in office, have serious reservations about forcing banks to get out of the derivatives business altogether.
Geithner, if he remains in his post for another year, could have enormous power to shape the vast market for derivatives. A senior member of Obama's economic team said that the administration has no objections to the Dodd amendment.
Michael Greenberger, a former top official at the Commodity Futures Trading Commission who has consulted with Lincoln on the derivatives legislation, criticized Dodd's amendment. He said it could leave in place risky trading activities that would come back to haunt taxpayers.
Greenberger said that if Lincoln's provision is delayed for two years -- or dropped sooner -- the government would remain on the hook if bank speculation goes bad. "This does not sound like a good compromise, certainly not for the American taxpayer," he said.
Just because Dodd's amendment was filed Tuesday doesn't mean it will come up for a vote. Senators have filed more than 325 amendments; only a fraction have been taken up. Dodd also could make changes to the bill through a "manager's amendment" that could be adopted just before the bill's final passage. Dodd's office did not respond to a request for comment Tuesday evening.
Amendment 4110 was not the only one Dodd filed in the waning minutes before Tuesday's deadline.
At 11:59 a.m., he submitted another provision dealing with yet another contentious and excruciatingly complex issue: prohibitions on certain types of risky derivatives known as credit-default swaps and "naked" credit-default swaps. Those rules, however, also wouldn't take effect for two years. And they, too, would require a ruling from the Treasury secretary on whether they should remain in place at all.