Financial Regulatory Forum

SNAP ANALYSIS – Goldman charges give lift to Lincoln US swaps bill

By Reuters Staff
April 16, 2010

By Roberta Rampton

WASHINGTON, April 16 (Reuters) – Bombshell fraud charges against Goldman Sachs, one of the largest swaps dealers on Wall Street, give new impetus to a tough derivatives reform bill proposed by Senate Agriculture Chairman Blanche Lincoln on Friday.

The bill must be meshed with other proposals that are part of Congressional efforts to reform the financial regulatory system. But Lincoln is now placed to play a leading role in the debate on how the final package will impact on the $450 trillion over-the-counter swaps market.

With one eye to the November mid-term elections, the bill could find support from lawmakers keen to take a stand against excess on Wall Street. But it is unclear whether the White House would support going this far.

Lincoln outlined the key points of her bill earlier this week, surprising derivatives players closely watching for the detailed language in the bill to gauge its impact and chances for success.

“This is another example of how risky Wall Street behavior puts our nation’s financial system in peril and further illustrates the need for the strong reform that my legislation provides,” Lincoln said in a statement provided to Reuters.

* Unlike bills from the Senate Banking Committee and the House of Representatives, Lincoln’s bill would require banks to spin off swaps desks if they are protected by federal deposit insurance or access the Federal Reserve discount window.

* Lincoln’s top aide told Reuters on Thursday he expected resistance to the measure from financial lobbyists.

* Democrats hope to capitalize on anti-bank sentiments to improve their political prospects going into mid-term elections.

* The U.S. Securities and Exchange Commission charged Goldman Sachs with fraud for marketing a credit derivative product which it said cost investors more than $1 billion.

The company said the charges are unfounded and

it will fight them.

* There is a chance for the measures to be watered down. Lincoln’s bill will be voted on by the Agriculture Committee as early as Wednesday, sending it on to the Senate. It must be merged with proposals from the Banking Committee into a broad reform bill that could move to the Senate floor this month. Then, it has to be reconciled with the plan passed by the House in December.

* Obama said on Friday he would veto legislation that did not bring the derivatives market “under control.”

* Traders questioned the timing of the SEC’s allegations.

“We don’t know when the SEC got this data but this thing took place a while ago. It’s interesting that it came out just now. Certainly it’s got a political implication whether or not the timing of the government releasing this case was politically motivated or not it might have an effect on the financial services overhaul bill,” said James Ellman, President, Seacliff Capital in San Francisco.

* It is still to be seen how this idea would mesh with a global crackdown on derivatives. The European Union’s financial markets chief, Michel Barnier, has said he may propose curbs on sovereign credit default swaps in October, and will in June propose regulations for derivatives focused on central clearing and reporting transactions to trade repositories.

* European leaders also want to back moves for a global levy on banks to pay for bailouts. That tax will be discussed later this year by the G20.

(Additional reporting by Charles Abbott and Christopher

Doering; Editing by Alden Bentley)

((roberta.rampton@thomsonreuters.com; +202 898 8376; Reuters

Messaging: roberta.rampton.reuters.com@reuters.net))

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