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FT Reports Blanche Lincoln Proposal For CDS Spinoff Set To Pass
In a stunning development, and what may be the biggest loss for the Federal Reserve's lobbying power in history, the FT reports that "Banks are likely to lose a key lobbying battle in the US over whether they will be forced to spin off their lucrative swaps desks, according to people familiar with financial reform negotiations in Congress. Defeat, which would be a further blow to Wall Street, has been made more likely by Paul Volcker, the influential former Federal Reserve chairman, softening his opposition to the provision." If this indeed happens, the fallout for the US financial system will be dramatic, as numerous Wall Street spin offs would have to occur immediately in order to preserve CDS trading, an event that would will also adversely impact valuation multiples. The biggest problem with the Blanche Lincoln proposal, however, is that it still appears nobody really knows just what its full implications are. And adding more fuel to the fire, is the latest whisper from Volcker, whom many thought had relented on toning down his Volcker proposal to prohibit prop trading by banks: "Some senators want to modify the Volcker Rule, which also prevents banks from owning or sponsoring hedge funds in the name of risk reduction, to allow banks to “organise” a hedge fund and make an investment in a small amount of capital alongside a customer. But Mr Volcker thought that would be the thin end of the wedge, adding “from my point of view, I’d like it pure”. Could Wall Street be finally losing its tentacular grip over Washington? We, for one, will not believe it until we see it: after all Chris Dodd and Barney Frank's unfettered access to lifelong indulgences from the Clearing House Association lies in the balance.
More from the FT:
Blanche Lincoln, the Senate agriculture chairman, is the lead proponent of the plan, which would force banks to create a separately capitalised subsidiary to house the derivatives dealing operations – a significant source of profits for big banks, such as JPMorgan Chase.
The expensive restructuring could drive activity out of the largest Wall Street banks and into more lightly regulated rivals and overseas competitors, according to the Federal Reserve and Federal Deposit Insurance Corporation, which oppose the plan.
Mr Volcker – who has become a talisman of the financial reform effort ever since the “Volcker Rule” to force banks to end proprietary trading was embraced by Barack Obama, US president, in January – previously opposed the Lincoln provision.
Although he declined to say whether he now supported it, Mr Volcker told the Financial Times that his earlier criticism was based on the belief that a stricter spin-off was in the works and it was now a “relevant question” whether damage would be done if swaps desks could be kept within a bank holding company.
“I tend to think of the bank holding company as the relevant organisation,” he said.
Mr Volcker added that it would be a mistake to ban banks from using swaps to hedge risk or from facilitating a customer who wants to hedge risk. “There was confusion about that – that’s the kind of thing I certainly would not do,” he said.
There remains disagreement over whether the legislation as currently drafted would prevent a newly capitalised swaps desk from selling a swap to a customer or from using them for its own hedging purposes. Ms Lincoln says it does not; many lawyers say it does.
Negotiations over the text, which is due to go to the White House to be signed into law by the end of next week, are focused on ensuring that those activities are preserved rather than removing the rule entirely, according to people familiar with the talks. However, that does not satisfy the industry or its regulators.
Should CDS trading be forced to move offshore, the question is "where?" - with Germany, and soon all of Europe, set to forbid unhedged CDS exposure (and if you thought Goldman selling CDO as unhedged pirncipal was tough explaining to the Senate, wait till someone explains that the CDS market will effectively have to collapse by a factor of 10 for its to be feasible) will China be the only place left where CDS traders are allowed to trade unregulated?
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Another Dog and Pony show. The stench from all that Dog and pony shit and piss fucking wreaks
I'll believe it when I see it. Like Dow 8200 maybe.
My thoughts exactly....heard murmurs like this plenty of times since last year.
Is the Glass Steagel repeal going to be part of this? If not, why?
"The expensive restructuring could drive activity out of the largest Wall Street banks and into more lightly regulated rivals and overseas competitors, according to the Federal Reserve and Federal Deposit Insurance Corporation, which oppose the plan."
Why do the FDIC and FED even care if this happens. The goal is not to have to bail them out.
Ain't Dodd dead yet?
Prohibiting banks and BHCs from using the Federal safety net to misprice their prop desk products does not at all mean that the separately capitalized prop desk subsidiary should not be US-based. In fact, the separately capitalized prop desk sub should be US-based. If the prop desk is foreign, it will be difficult for the Fed to exercise comprehensive consolidated supervision.
Some might very well snicker or guffaw at such a thought, but requiring the prop desk sub to be US-based will provide the opportunity for more meaningful supervision. Further, the prop desks subs should be required to produce separate financials so independent risk-based capital and other assessments can be made.
Finally, foreign prop desks that participate in the US market must be required to demonstrate that they are not afforded an undue advantage via a more lax foreign regulatory regime. I'll leave US prop desk sub's participation in foreign markets for later.
Any politician who opposes this bill will be deemed a traitor. How much more public money needs to be put at risk and lost before people wake up and realize we need glass steagal II.
How much more public money needs to be put at risk - Heck, I am thinking all of it. No one will be happy until every single penny is gone.
at risk? i don't think that's the way jamie and lloyd look at it. they see it as their money that they just haven't managed to collect from the public as yet.
not to worry tho, they are going to get it all. this lincoln woman will be put in her place tomorrow or the next day....they will remind her in some manner, that they are the royalty and in charge, and her job is to keep the peasants quiet while the money is siphoned away and into the coffers of JPM and GS.
"... this lincoln woman will be put in her place tomorrow or the next day..."
my thoughts exactly. brooksley born all over again.
The dear Ms Lincoln might be sure that he has a food taster, someone else start her car, and takes no airplane trips in the near future. The Boyz aren't gonna like this.
wow...this is going to make it harder to completely empty the treasury and the peasants' retirement accounts.
this wasn't supposed to happen until all 401(k) were completely destroyed (handed over to the banks) and the peasants were locked into at least four decades of debt servitude......
what's going on? -1287
Depending upon when the public negotiations take place during the reconcilliation phase of this financial "regulation" bill, we will most likely see some sort of precipitous drop somewhere in the equity market. In fact, the violent clashes of no-volume melt-ups and fat finger frenzies seem to just follow the path of the legislative process just like a hostage negotiation.
The only saving grace in this whole situation would be that the financial terrorists of Tim Geithner and Ben Bernanke have run out of hostages to kill. I doubt it though. Still more "suicide banking", as so appropriately put by Max Keiser, is to come I am afraid.
Why is it the Chinese seem to get regulation right (e.g., recent simple but effective curbs on real estate speculation) but the charlatans in DC continue to muck it up?
'possibly because you can get executed -- rather quickly -- in china for ripping off the public, whereas here, after paying off the politician and adding a nice tip to the vig, you get to go on your merry way...much richer.
You are very right!
Central banks have been beat back before. Maybe this is the real deal. Hopefully.
I wouldn't be wiggling the cork on that champagne bottle just yet. The up front dog and pony show will be the news, the actual legislation (which nobody will read) will be the background noise.
"I wouldn't be wiggling the cork on that champagne bottle just yet." I agree. Let's wait until it's actually signed into law before we ice down the fizzy wine.
http://twentypercent.tv/2010/06/14/frontline-the-warning-how-derivatives...
i expect my two senators, amply subsidized by wall street money, will find some reason to support any and all efforts to kill this bill in the crib.
i mean, they have shown us all time and time again that they do not represent the peasantry of our state. Nope. Their consituency is Wall Street.
no chance in the world that this effort lasts past tuesday. and we should drop all the pretense that our government isn't hostage to wall street. we should call a spade a spade and get on with allowing them to steal everything that isn't nailed down.
when they've got it all, they'll leave.....and we can start trying to rebuild. so...the sooner this all happens the better. in fact, maybe a better bill would be one that signs over whatever is left in the treasury and all retirement savings to JPM and GS by noon next Friday.
A freind of mine asked: Who owns all these derivatives?
I said hedgefunds, banks, insurance companies, pension funds. Anyone add to that with question: Who and what is in danger when the air comes out of them?
DOW chart warns of a rally :
http://stockmarket618.wordpress.com
http://www.zerohedge.com/forum/latest-market-outlook-1
I can see it now- Chris Dodd, Barney Frank and their ilk, hoovering up all they can from their real paymasters, then a convenient death-bed repentence. "I never realised I was being duped......"
blanche has a run off election in a week or two doesn't she? i'm sure we can funnel a billion or two down her way to make sure she loses...
doncha think? so zip it blanche, or adios
That was last week, and she pulled off a squeaker. This provision was allowed by the PTB in order for her to campaign as being for the 'little people'. Unfortunately for the PTB, the election dragged on into a run off, and now it will be difficult to remove the language without people noticing.
Bait-and-switch worked for Bernie Sanders, why not for Blanche?