Blanche Lincoln and Derivative Reform

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Noam Scheiber’s interesting article on financial regulatory reform reports that banks are feeling like they’ll need to make concessions on something, and are perhaps prepared to give way on a fairly strong Consumer Protection Agency in exchange for getting their way on other points. In particular, Scheiber looks at the state of play on derivatives. The House bill went pretty soft on the banks on this front, but both the White House draft and Chris Dodd’s bill are tougher. What’s more, one of Frank’s key guys on derivative issues just took the revolving door over to Wall Street, prompting widely praised disciplinary reactions from Frank, and an enhanced level of resolve on his part.

But Scheiber says the banks are fairly confident that Blanche Lincoln will bail them out:

And, yet, when you talk to industry representatives, they don’t appear overly troubled by the recent turn of events. Most continue to regard the derivatives provision in Dodd’s bill as a placeholder, which will almost certainly be nudged aside by a compromise negotiated by Democrat Blanche Lincoln and Republican Saxby Chambliss. (The two senators run the Agriculture Committee, which shares jurisdiction over derivatives.) As one lawyer involved in the derivatives industry told me last week, “If they try to push the Dodd bill as currently written on derivatives—it can’t fly.”

What explains the serene confidence? “Derivatives is the tail on this dog,” the lawyer continued. “It’s not what’s going to drive the bill through Congress. Nor is it the filibuster point. Other stuff makes a lot more noise.” The bottom line, this person concluded, is that voters just aren’t very invested in the details of derivatives reform, and so it’s hard to believe the Democrats will be, too: “Words on the page are not that critical to the public. … The public just wants to see something done here. … To some extent, passing a bill [whatever the details] will be marketed as a success.”

I’ve heard this expressed as a concern by people at Treasury. Simply put, it’s difficult to sustain mass public interest in the question of whether or not too many loopholes have been put in a regulation requiring derivatives to be traded via clearinghouses. That said, elite opinion matters too. Lincoln is currently facing a primary challenge that some liberals like Scheiber’s colleague Jonathan Chait think is unwarranted on the grounds that she represents a very conservative state. It seems doubtful, however, that anyone can rationalize a pro-Wall Street stance on derivative regulation as crucial to political viability in Arkansas.