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Monday, June 14, 2010

Financial Reform to Spin off Swaps

Financial reform appears to be heading toward spinning off swap desks.

Banks are likely to lose a key lobbying battle in the US over whether they will be forced to spin off their lucrative swaps desks, according to people familiar with financial reform negotiations in Congress.

Defeat, which would be a further blow to Wall Street, has been made more likely by Paul Volcker, the influential former Federal Reserve chairman, softening his opposition to the provision.Blanche Lincoln, the Senate agriculture chairman, is the lead proponent of the plan, which would force banks to create a separately capitalized subsidiary to house the derivatives dealing operations – a significant source of profits for big banks, such as JPMorgan Chase.

Following the stock market crash in 1929, the Congress passed the Glass Steagall Act. That separated traditional banking activities from riskier investment banking activities. In 1999, that was largely reversed through banking deregulation.

This wouldn't exactly be a return to Glass Steagall, though that's also being proposed. This would, however, separate the very risky swaps trading from traditional banking activities.

One of the contributing factors to the financial crisis was that risky activities went bad for traditional banks and brought their entire operations to their knees. So, financial reform would separate one of these, swaps trading. If you are involved in swaps trading, you would have to do it separately from traditional banking activities.

1 comment:

AG said...

Talk amongst Democrats lately is that Lincoln never would have supported this were she not under threat of a primary challenge.