Colin Barr

Following the money in banking, economics, and Washington

Barney Frank: The Lincoln assassin?

May 25, 2010: 4:58 PM ET

Chalk up another vote against Blanche Lincoln's crackdown on the financial weapons of  mass destruction.

Rep. Barney Frank, D-Mass., said in a speech in Washington Tuesday that the regulatory reform bill passed by the Senate last week "goes too far" in proposing to bar the biggest banks from dealing in derivatives.

Banks are open

Five bank holding companies -- JPMorgan Chase (JPM), Bank of America (BAC), Goldman Sachs (GS), Citigroup (C) and Morgan Stanley (MS) -- hold 95% of the outstanding over-the-counter derivatives, according to the Office of the Comptroller of the Currency. The business of selling instruments from interest rate and currency swaps to the widely despised credit default swaps has been growing rapidly and constitutes one of the industry's biggest profit centers.

A bill pitched by Sen. Lincoln, D-Ark., would split the banks' derivatives businesses from the federally insured banks, in a bid to keep taxpayers from having to foot the bill should a dicey trade bring down a bank.

Lincoln's proposal is viewed in some circles as so draconian that Wall Street expected it to be excluded from the final bill that Senate Banking Committee Chairman Chris Dodd, D-Conn., pushed through last week. Regulators such as FDIC chairman Sheila Bair and Fed chief Ben Bernanke had joined Dodd and some leading Senate Republicans in calling the proposal unworkable.

Yet the derivatives proposal ended up surviving the final vote. This means that the views of legislators like Frank -- who is not known as a great friend of Wall Street -- could be crucial.

For now, it appears Frank (above) sees the derivatives bill as a belt-and-suspenders measure that duplicates the Volcker restrictions on risky trading without adding much to them.

"I don't see the need for a separate rule regarding derivatives because the restriction on banks engaging in proprietary activities would apply to derivatives as well as everything else," he said, according to the Wall Street Journal.

This looks like good news for the banks, though it's early yet to say how the final product will turn out. Frank, after all, has been proposing to televise the negotiations of the conference committee working on a final bill, in a bid to hold legislators accountable to anti-bank rage.

For now, investors will take what they can get. Bank stocks ended Tuesday flat to slightly higher after a shaky start.

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About This Author
Colin Barr
Colin Barr
Senior Writer, Fortune

Colin Barr has covered finance for Fortune.com since November 2007. Previously he was a writer and editor for TheStreet.com, winning a 2006 Society of American Business Editors and Writers award for "The Five Dumbest Things on Wall Street," and for Dow Jones Newswires. He is a 1991 graduate of Penn State and lives in Port Washington, N.Y., with his wife Meena Bose and their two kids.

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