11th Hour Cat Herding

I’m trying to follow the financial regulation bill as it morphs into something to attract votes. It’s just been announced that Harry Reid

"Too Big to Fail"

will call for a vote because Susan Collins of Maine–and possibly some others– is willing to leave the Just Say No Republican Bloc. Lame Duck Chairman Dodd evidently is playing enough with Blanche Lincoln’s derivative amendment to bring some Naysayers into the fold. The sticking point was derivatives. Lincoln’s amendment sought to ban commercial banks from dealing in derivatives. It was seen as an attempt to bring back some sense of Glass-Stegall to financial institutions. While Blanche was back in her district trying to cast a vote for herself in an election where she now faces a run-off, Dodd was wheeling and dealing on the cornerstone ‘brag’ in her record.

There’s bits and pieces of this story all over the web, but it’s hard to find anything definitive. The best two that I’ve found to date are from Bloomberg and FT. The derivatives amendment is pretty much hated by Republicans who believe that the business will just go elsewhere in the world and make the US banking industry less competitive. There’s also some last minute wrangling to give the states more leeway in terms of their own state banking laws and regulations. This is seen as a compromise because some states could tighten regulations but others could leave them more loose per the federal regulation.

Anyway, I’ll try to highlight some of the articles cited above to see if we can’t get a sense of where this is headed. The first maneuver by Dodd, yesterday, was to keep the Lincoln amendment, but delay implementation for two years, pending a study. This change was dropped earlier today. This maneuver is explained pretty well in this Bloomberg piece.

Dodd filed an amendment yesterday that would delay a measure requiring banks to put their swaps-trading desks in subsidiaries pending a one-year study of its effects by a new council of regulators. The amendment would let the panel eliminate the rule if it was found to “have a material adverse effect on the financial markets and economy.”

The decision against offering the amendment leaves open an issue that has complicated the overhaul debate since Senator Blanche Lincoln proposed her derivatives measure last month. Lincoln, an Arkansas Democrat facing a battle for the party’s nomination as she seeks reelection, has said she will defend efforts to strip the provision.

Dodd’s decision means the Senate legislation is likely to include the rule, which would force banks such as Goldman Sachs Group Inc. and JPMorgan Chase & Co. to move swaps trading to subsidiaries, when it comes up for a final vote as soon as this week.

Republicans definitely don’t like this and are arguing that it will actually bring more uncertainty (and therefore variability and instability) to the market. The FT article believes that this may be overstated because it believes the intent of the ban is slightly different than what is portrayed by the industry. They don’t see it as an outright ban but a partial ban impacting some institutions.

However, Mr Dodd’s proposal appears to ban dealing in derivatives only if it does not comply with the Volcker Rule, the proposal elsewhere in the bill that prevents banks from trading for their own account, owning hedge funds and private equity firms.

It also gives discretion to regulators to call off the ban after a study of the consequences to be delivered within a year.

Those regulators have come out strongly against a proposed ban on banks from dealing in swaps, one area of the derivatives market, which is in the existing bill and which Mr Dodd’s language is designed to replace.

Republicans blocked a vote on the Merkley-Levin amendment on Wednesday night which would have increased the scope of the Volcker Rule and which is opposed by most of the banks.

So, this brings us back to the Volcker Rule that we’ve discussed here before. This is a rule that seeks to establish a Glass-Stegall lite that replaces the wall of separation that used to exist between financial intermediary functions (that would be bank deposit/lending activities) and investment banking (that would be market making and financial innovation). Under Glass-Stegall, financial institutions could do one or the other. The could not have units that did both. Again, the FT talks about the amendment that places state and federal banking laws at odds. Notice that Tom Carper(d) from Delaware is doing the heavy lifting for big banks here.

In a partial victory for the banks, senators approved by a vote of 80-18 an amendment from Tom Carper, a Democratic senator from Delaware, to restrict the rights of individual states to apply consumer protection rules to banks. Large banks that operate across state lines had argued that they should be subject to only one standard.

The American Bankers Association said that without it “consumers and their banks could have been subject to potentially hundreds of different and confusing state and local laws covering their loans, checking accounts, credit and debit cards, or ATM usage”.

State attorneys-general will retain a role in protecting consumers but they could not bring class action law suits against national banks and the Office of Comptroller of the Currency could supersede their action under the amendment. Amid other changes and compromises in the final hectic hours of considering the bill, senators were also trying to reach a compromise over language in the bill that places a “fiduciary” duty on banks to look after its clients’ interests. Banks and some regulators say it is unworkable and ignores the realities of market making .

The NYT–in an article this morning–does a pretty good job at dissecting the Republican discontent. Republicans have traditionally been the workhorses for the American Banker’s Association and they’re playing that role here. However, the watering-down process seems due more to Democrats like Carper even though Reid has been trying to find some Republican support for a super majority vote. I’m not sure how far Mitch McConnell can get with this type of rhetoric in this political atmosphere. I believe that he will soften since the Murtha seat in PA 12 was retained by the Democrats and the Rand Paul victory in his home state of Kentucky. The results of the elections last night didn’t say anything positive for candidates supported by either party’s titular heads within the beltway.

The remarks by Republican leaders on Tuesday suggested they saw no benefit in joining with the Democrats even to impose tougher rules on Wall Street. At a news conference, the Senate Republican leader, Mitch McConnell of Kentucky, blamed the White House.

“The marching orders are coming from downtown: push the bill as far to the political left as possible,” he said. “Look at the last 15 months. They’re running banks, insurance companies, car companies, taking over the student loan business, taking over health care, now, apparently doing to the financial services industry what they did to the health care industry.”

“This is a massive government overreach,” Mr. McConnell said, adding that Republicans were confident about their political prospects. “The American people are saying, ‘enough’ and I think that’s why everyone is anticipating a major midcourse correction this November.”

Again, Reid will schedule the vote and is planning on support from some Republicans. Politico is reporting that Susan Collins of Maine has bucked the Republican wall of no.

There is still a significant amount of work to be done — and arguments to be had on the Senate floor — before Reid’s 2 p.m. deadline, and it is still not entirely clear that the majority leader has enough votes to clear his 60-vote cloture hurdle.

But one Republican, Sen. Susan Collins of Maine, will vote yes on cutting off debate, her spokesman told POLITICO Wednesday morning. That makes her the first GOP senator to publicly break with her party on the crucial vote.

Tuesday afternoon Reid had said that “a number” of Republican senators told him they would vote to cut off debate, and Republican aides said they felt Democrats would be able to swing enough votes to move to the next procedural phase of the bill.

Yet aside from Collins, very few GOP senators have stated publicly their support for cloture, and even several Democrats — including Byron Dorgan of North Dakota and Ben Nelson of Nebraska — are still on the fence.

P.S. You can add other things to this thread. I won’t mind at all.