ANALYSIS-Key US senator gains clout on Wall Street bill

June 9, 2010

WASHINGTON, June 8 (Reuters) – U.S. Senator Blanche Lincoln, an Arkansas moderate Democrat, is buoyed by winning nomination to a third term in the Senate but not sure of victory for her hot-button Wall Street reform — forcing big banks to spin off their swaps desks.

The proposal is one of the salient disputes for House-Senate negotiations that could begin this week on a financial regulatory reform law. The Senate endorsed the idea. The House is silent on the question.

“I’ve stood up to special interests and I’ve done it for you,” Lincoln said in a victory speech in Little Rock, Arkansas after edging Lieutenant Governor Bill Halter in a runoff election.

* Ballot-box success carries weight in Congress. Winners, especially in a rough year for incumbents, impart momentum to their legislation. Lincoln has said she will fight to see the swaps-desk spinoff become law. She surmounted earlier predictions that the spin-off was doomed. There is broad opposition so it appears an uphill struggle for Lincoln.

* While Lincoln is the only senator identified with the spin-off, she has some backing. Vermont Sen Patrick Leahy supports the spinoff, says an aide. Lincoln and Leahy are among the 12 Senate negotiators on the financial reform bill so she will have a direct role in the negotiations.

* Two financial analysts said Lincoln may be more willing to compromise ahead of the November general election. By nature, she is a centrist. But one analyst said the spin-off may become a reality because Wall Street is a popular target.

* The so-called Volcker rule often is mentioned as an alternative to Lincoln, since both involve trading by banks in derivatives. The Volcker rule would bar banks from buying and selling investments on their own accounts unrelated to customers’ needs. Two senators said on Tuesday they are working on a stronger version than was included in the Senate bill.

* Chairman Sheila Bair of the Federal Deposit Insurance Corp said in a May letter that a spinoff would drive swaps trading into “less regulated and more highly leveraged venues.” White House economic advisor Paul Volcker said banks should have the power to serve their customers’ hedging needs.

* Banks could lose billions of dollars in revenue if a complete spin-off is mandated. Lincoln says banks would move the swaps desks to affiliates, a less painful step. Goldman Sachs, Citigroup, JPMorgan Chase, Bank of America, and Morgan Stanley dominate the derivatives market.

(Reporting by Charles Abbott, Editing by Sandra Maler)

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They are becoming some kind of extrange creatures.

Journalists, analysts, media refer to these investors as SHORT SELLERS. BEAR SPECULATORS challenging governments, policies and rules.

It is not less true that SHORT trading is perfectly legal in current financial arenas. It is not less true that MAKING A PROFIT out of an speculative position is legal. But now, when governments suffer to get the necessary stabilisation for their currencies, debt and economic policies, these SHORT SELLERS are demoned.

If these market practices became operative some day in the past, it should be because someone considered them right for the markets well functioning or at least for the increase in liquidity.

Now, when they are used in an uncontrolled manner, we try to demon them as WILD RIDERS of DEFAULTS and CRISIS in our governments worldwide.

It is very true that young traders sitting on their leather chairs and escorted by big investment companies or hedge funds may be playing aggresive with these instruments against weak countries. But regulation must be there to observe if illegal practices are being undertaken. If not, we cannot reduce these practices that once were approved.

Today, Sarkozy and Angela Merkel, prime ministers for France and Germany respectively, decided to propose to the european financial authorities some kind of limitations to the short positions held in CDSs and sovereign debt issues.

CDSs, known as CREDIT DEFAULT SWAPS are something like the insurances against the countries defaults in debt. But, at the same time, have become a very common derivative speculation tool for daily traders.

In some cases, the volume traded in CDSs for one country is higher than the debt itself they are covering.
So, this is showing a clearly irrational use of the tool for speculative purposes, and obviously in this case, authorities must intervene.
Very similar to those cases where an automatic stop in trade is executed when volatility achieves irrational levels in the daily trading of a determined stock quoted in a financial market.

I am clearly the opinion that speculation is existing nowadays. It has always existed, and this speculation, more than ever, is challenging the governments image and credibility.

But, at the same time, we must acknowledge that unlimited free investment vehicles must be anyhow be driven into supervision, not because of their free investments but because of the huge leveraged amount of funds they invest daily in the financial “plazas”, and that may alter the face value determined as OFFER and DEMAND.

Jose Luis Revilla Escudero
Chairman & CEO
WWShares, Inc
-Private Wealth Advisors-

Posted by WWS | Report as abusive

Well said this is why small firms are going to grow out of this debacle there job is to invest for there clients not themselves.

Posted by nightlight76 | Report as abusive