Banks Lobbying Against Derivatives Trading Ban

[Cees Binkhorst]

REPLY TO: D66 at nic.surfnet.nl

Wie zou daar nou door verrast zijn? De banken willen zonder regels
doorgaan met handel in derivaten ;)

Groet / Cees

May 9, 2010
Banks Lobbying Against Derivatives Trading Ban
http://www.nytimes.com/2010/05/10/business/10lobby.html
By BINYAMIN APPELBAUM and ERIC LICHTBLAU

Cory Strupp, who represents Wall Street in Washington, spent the last
six months lobbying for more than two dozen changes in the derivatives
chapter of the Senate’s financial legislation.

He has spent the last two weeks focused on one: eliminating a new
provision that would require banks to leave the lucrative business of
derivatives trading.

Democrats surprised the industry by adding the “push-out” provision in
mid-April, transforming the final rounds of an epic prize fight. The
industry has been forced to set aside the issues that were its greatest
concerns, including its opposition to a requirement that almost all
derivatives trades be recorded on public exchanges.

Mr. Strupp, who works for the Securities Industry and Financial Markets
Association, a Wall Street trade group in Washington, said that he
generally has only 30 minutes to sway a senator or aides. He said he now
uses almost the entire time to argue that banks should retain the right
to trade derivatives.

The nation’s five largest banks, which dominate the derivatives
business, have dispatched trade groups, paid lobbyists and their own
executives to convince senators that excluding banks from the
derivatives business would make markets less safe by shifting the
trading to foreign banks and other institutions that are subject to less
federal oversight.

The provision that would prohibit banks from trading derivatives has
alarmed the industry because it strikes at the combination of commercial
banking and Wall Street trading that defines the modern industry.

By one count the five banks together have mustered more than 130
registered lobbyists, including 40 former Senate staff members and one
retired senator, Trent Lott. The list includes former staff members for
the Senate majority and minority leaders, the chairmen and ranking
members of the banking and finance committees, and more than 15 other
senators. In the first quarter, the banks spent $6.1 million on lobbying.

Bankers and Congressional aides say the provision is likely to be
weakened or removed, in part because the Obama administration and
leading Democrats are concerned that it would diminish oversight of the
derivatives marketplace. But the bankers and aides also agree that the
focus on derivatives has increased the chances that other controversial
proposals will pass, including a ban on “proprietary trading,” or
trading in their own accounts.

“A lot of oxygen has been burned here in talking about where we are on
derivatives,” said Rob Nichols, president of the Financial Services
Forum, a trade and lobbying group for 19 of the nation’s largest
financial institutions.

Derivatives are contracts whose value is determined by something else.
Trading in derivatives is dominated by the nation’s five largest banks,
JPMorgan Chase, Goldman Sachs, Bank of America, Citigroup and Wells
Fargo. Most deals are done in private, making it difficult to compare
prices or identify problems.

The financial legislation proposed by the Obama administration and
passed by the House would require most derivatives to trade on public
exchanges, in the belief that a transparent marketplace will be safer
and cheaper. The scope of the exchange trading requirement has been the
focus of the debate for months. Opponents argue that the bill would
limit the industry’s ability to customize derivatives to match the needs
of clients.

Then the chairwoman of the Agriculture Committee, Senator Blanche
Lincoln, Democrat of Arkansas, dropped a bombshell in April, introducing
language that would require banks to choose between trading in
derivatives and remaining under federal protection.

The government’s umbrella, including deposit insurance, allows banks to
raise money at lower cost than other financial institutions. Mrs.
Lincoln said the bill would help to ensure that banks use that cheap
money for traditional activities like lending.

The financial industry says that derivatives are a valuable product used
by more than 95 percent of Fortune 1000 companies to hedge against
risks, including price changes.

“These swaps have become standard bank products. The proper response
would be to recognize that the markets have evolved and there’s been
innovation and they need to be regulated by bank regulators rather than
pretending that they’re not integral to the system,” said Daniel F. C.
Crowley, a partner at the K&L Gates law firm and an industry lobbyist.

The change could cost the industry a lot of money. Banks reported $22.6
billion in derivatives revenue in 2009, according to the Office of the
Comptroller of the Currency.

Banking executives were caught flat-footed by Mrs. Lincoln’s provision,
and many are still seething. One senior executive at a major financial
institution, speaking on condition of anonymity so he could talk
frankly, said the idea was “irresponsible” and the details revealed a
basic ignorance about the financial industry.

The executive, who said he had spoken with several senators in recent
days, said the industry now was simply trying to get a hearing. “We’re
on the outside, knocking on the window and saying, ‘Hey, listen to us
just a little bit,’ ” the executive said.

Mr. Strupp says he tries to explain to senators and aides that they
should not be too hasty in blaming derivatives for the financial crisis.
He often refers to how one of the first interest-rate swaps from the
early 1980s has become a common kind of derivative that protects
companies against changes in interest rates. He says he still tells that
story on Capitol Hill as part of a broader effort to explain how a
complicated and often-misunderstood category of financial products grew
up and became important to the broader economy.

“I talk to people about why they should be careful about impairing the
use of derivatives,” Mr. Strupp said.

The Senate has proved to be a difficult audience. When Senator
Christopher J. Dodd, Democrat of Connecticut, released a draft of the
financial legislation in November, Mr. Strupp and his clients drew up a
list of roughly 30 problems that the industry had with the proposals.
About two dozen of those provisions remain in the bill.

But the industry has gained important allies in its opposition to the
Lincoln provisions. Timothy F. Geithner, the Treasury secretary, has
expressed concern about the impact on regulation of derivatives trading.
And on Thursday, Paul A. Volcker, the former Federal Reserve chairman,
said in a letter to crucial senators that the proposed ban on
proprietary trading, which the administration has called the “Volcker
rule,” was sufficient to address the most worrisome kinds of derivatives
trading.

“The provision of derivatives by commercial banks to their customers in
the usual course of a banking relationship should not be prohibited,”
Mr. Volcker wrote.

Opponents of the Lincoln provisions still must persuade senators to vote
for a change that could be portrayed as softening the financial
legislation. Only Republicans have expressed public opposition. Senator
Judd Gregg of New Hampshire, with Senator Bob Corker of Tennessee and
Senator Saxby Chambliss of Georgia, introduced an amendment on Friday to
remove the Lincoln language from the bill.

The challenge, said one lobbyist, is that senators may not support Mrs.
Lincoln’s language, but they have political problems with opposing it
because of the public’s anger at Wall Street.

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