WASHINGTON — A controversial derivatives regulation plan would allow large banks to spin off their derivatives operations into an affiliate under the same parent company, an aide to Senate Agriculture Committee Chairman Blanche Lincoln, D-Ark., said Wednesday.
The statement from Courtney Rowe, a spokeswoman for Ms. Lincoln, clarifies confusion about a fundamental part of the financial overhaul bill, which many believed could have forced banks to completely spin off their derivatives desks into separate entities. The legislative language in the financial overhaul bill was ambiguous about whether complete spinoffs would be required.
Putting derivatives operations into an affiliate isn't likely to cool criticism from Wall Street banks. They would still have to put up billions of dollars in new capital to support these affiliates. But it could help Ms. Lincoln win support from other lawmakers aiming to put tighter curbs on Wall Street.
The lawmaker on Wednesday offered a blistering defense of her proposal, blasting "Wall Street" banks and lobbyists for "misinformation and untruths."
During remarks on the Senate floor, she showed no signs to backing away from her provision, even though Treasury Department, Federal Reserve, and Federal Deposit Insurance Corp. officials have either raised concerns about it or said it should be scrapped entirely.
"Wall Street lobbyists have also said this provision will move $300 trillion worth of swap activities outside of the banks," Ms. Lincoln said. "My question is: Why is this activity there in the first place?"
Ms. Lincoln's provision has emerged as one of the most controversial elements of the financial overhaul. Many Democrats and some administration officials have been reluctant to openly criticize the provision, as it could make them appear to side with Wall Street.
Ms. Lincoln repeatedly castigated Wall Street during her statement on the Senate floor but said her provision wouldn't completely outlaw banks offering derivatives. For example, Ms. Lincoln said community banks would still be able to use derivatives swaps to "hedge their interest rate risk on their loan portfolio" and offer "a swap in connection with a loan to a commercial customer."
"Using these products to manage risk or designing exotic swaps which have led to the financial demise of places like Jefferson County, Ala., Orange County, Calif. and the country of Greece are two very different things," she said. "Hopefully this is something my colleagues will understand."