WASHINGTON — The Senate Agriculture Committee on Wednesday approved by 13-8 tough new curbs on financial derivatives, including a ban on most direct bank trading of the tools, which played a big role in exacerbating the 2008 financial crisis.
Derivatives are financial bets between private parties. Their value is derived from movements of an underlying asset. Some derivatives, such as oil futures contracts, already are regulated and trade on an exchange. Congress is trying to address the over-the-counter products that are often called swaps because one party wants to swap a risk it's assumed to another party that’s willing to shoulder that risk for a fixed price. Swap deals cover everything from movements in the prices of contracts for delivery of barrels of oil or bushels of wheat to changes in the value of the dollar versus other currencies. These swaps currently take place off regulated exchanges.
The ban would require banks to spin off divisions that trade in the lucrative but opaque financial instruments into free-standing subsidiaries.
The vote sent a strong signal that not only are Democrats eager to take bold steps to revamp the regulatory process, but also that Congress may enact a broad overhaul of Wall Street practices.
Sen. Charles Grassley, R-Iowa, joined 12 Democrats in approving the new limits, the first time this year that a Republican senator has sided with the opposition on sweeping financial legislation. Grassley said he voted for the measure because “transparency is the right policy,” though he warned that he might vote against the final bill.
Other Republican senators also talked in conciliatory terms, an indication that they're feeling trapped between constituents demanding action against Wall Street excesses and their financial industry donors.
President Barack Obama will give the effort a push Thursday, when he travels to New York to call for tougher regulation of derivatives. The speech, White House Press Secretary Robert Gibbs said, will strike a balance between “calling out obscene bonuses” and “also saying that we don’t want to overly or unduly burden private enterprise and American business from operating.”
Wednesday’s derivatives vote was the final, and probably the most difficult, hurdle for the bill before it reaches the full Senate, perhaps as soon as Thursday. The derivatives curbs, which would be tougher on banks than those the House of Representatives passed last year, are expected to be added to broader legislation from the Senate Banking Committee that would change how financial institutions are regulated.
‘‘Wall Street’s interests are different from Main Street's. ... Wall Street's interest is to keep inefficient markets. This (legislation) is about promoting efficient markets,” said Commodity Futures Trading Commission Chairman Gary Gensler, who worked at Wall Street financial giant Goldman Sachs for 18 years.
The Agriculture Committee measure would bring new transparency to a market that's thrived on private information flows that critics think have worked to the benefit of Wall Street and the detriment of ordinary people.
The legislation would require trading in derivatives to take place, at a minimum, through clearinghouses, where there's a referee between private parties.
Banks such as JPMorgan Chase & Co., Goldman Sachs and Bank of America Corp. would have to turn their derivatives desks into subsidiaries, a move designed to build a firewall between consumers' deposits and the swaps markets’ speculation.
Many portions of the vast derivatives market, valued in the trillions of dollars, also would have to be traded on an exchange. This could shift some clout from Wall Street to Obama’s home city of Chicago, where the Chicago Mercantile Exchange would be a big winner because it’s already the primary marketplace for agricultural derivatives trading.
The legislation would exempt so-called “end users,” who aren’t speculating but rather hedging against changes in currency values, interest rate movements or shifts in prices for commodities such as oil or grain.
Both the clearinghouses and exchanges would trigger far greater reporting to regulators, giving the government a greater understanding of these markets.
Sen. Saxby Chambliss of Georgia, the committee’s top Republican, countered the Democrats’ plan with one that reflected what Wall Street banks and lightly regulated hedge funds want: greater reporting requirements after a transaction has closed instead of upfront transparency. It lost on a 12-9 party-line vote.
The debate foreshadowed the shifting politics of a congressional election year. Grassley is up for re-election, and Agriculture Committee Chairman Blanche Lincoln, D-Ark., faces a May 18 primary and a difficult re-election.
Lincoln championed a tougher line on derivatives than the White House did. She initially was a reluctant supporter of the Democrats’ health care legislation, and liberals have criticized her as siding too often with Republicans.
Republicans contended she took orders from the White House, including cutting Republican senators out of serious talks.
“That is so absurd,” she said. “I have never heard from the White House, and I have never heard from the secretary of the Treasury.”
Both parties made it clear Wednesday that they want to avoid a partisan battle like the debate over health care. “It’s pretty obvious we agree on 90 percent of the issues out there,” Chambliss said.
However, some Democrats voiced concerns about the bill. Sen. Tom Harkin, D-Iowa, questioned whether regulators have the resources to police traders effectively.
Gensler voiced confidence that his agency could handle the expanded work load, noting that the Obama administration has given him more money and staff.
(Margaret Talev contributed to this report)
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Sen. Lincoln on derivatives bill
Sen. Chambliss on derivatives bill
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