House Passes Bill on Derivatives

WASHINGTON â€" The House of Representatives, with bipartisan support, passed legislation on Wednesday that would roll back a major element of the 2010 law intended to strengthen the nation’s financial regulations by allowing big banks like Citigroup and JP Morgan Chase to continue to handle most types of derivatives trades in house.

The bill, which passed Wednesday by a 292-122 vote, would repeal a requirement in the Dodd Frank law that big banks “push out” some derivatives trading into separate units that are not backed by the government’s insurance fund.

But the debate Wednesday regarding this decidedly technical matter quickly turned into an impassioned dispute over the role the federal government has played since the end of the recession in regulating the nation’s financial markets. Advocates of the legislation argued on the House floor that the federal government is in part responsible for the slow rate of economic growth, by imposing excessive new regulations.

“America’s economy remains stuck in the slowest, weakest non-recovery recovery of all times,” said Representative Jeb Hensarling, Republican of Texas, the chairman of the House Financial Services Committee. “Those who create jobs for America are drowning in a sea of red tape preventing them.”

But opponents of the measure said that reckless activity by banks like JP Morgan Chase, where a group of traders in London ran up to $6 billion in losses in 2011, demonstrate that the tough requirements contained in the Dodd Frank law, passed in 2010, should not be weakened.

“It is clear that Wall Street has not learned its lesson,” Representative Collin Peterson, Democrat of Minnesota during the debate. “This bill would effectively gut important financial reforms and put taxpayers potentially on the hook for big banks’ risky behavior.”

The House legislation, formally known as the Swaps Regulatory Improvement Act, has little chance of becoming law, as the Senate has so far not moved ahead with its own version of the legislation, and the Obama administration has spoken up in opposition to it, arguing that regulators should be given a chance to adopt various Dodd-Frank related regulations before the law is revised.

But the vote Wednesday, which included the support of 70 House Democrats, followed months of intense lobbying by Wall Street banks, as both the banks and lawmakers who support the proposal clearly hope that the bipartisan support the bill received in the House will send a strong message to the Obama administration to tread carefully as it drafts the remaining regulations necessary to fully enforce the Dodd Frank law.

In fact, emails reviewed by The New York Times show that Citigroup lobbyists drafted more than 70 of the 85 lines of the House bill, as they attempted to come up with language that both Democrats and Republicans on the Financial Services Committee could support.

A main culprit in the 2008 financial crisis, derivatives are contracts that allow companies to either speculate in the markets or protect against risk. Credit derivatives helped push the insurance giant American International Group to the brink of collapse in 2008.

But lawmakers supporting the legislation Wednesday said that the types of derivatives trades that major banks would be allowed to still handle would not put them at any greater risk, and they noted that the legislation explicitly states that federal insurance could not be used to bail out banks based on losses involving these trades.

Instead, they said, by allowing banks to handle a broader array of derivatives trades, it will lower costs for businesses nationwide that rely on these financial instruments.

“Many Americans may not realize it but farmers, ranchers, manufacturers, and other employees use a financial product called a derivative to manage risk and protect themselves from extreme fluctuations in the price of things like fuel, fertilizers, and commodities,” Mr. Hensarling said. ” And that derivative is directly linked to the cost of that tractor for my constituent.”

Mr. Hensarling’s remarks were echoed by several Democrats, such as Representative Jim Himes of Connecticut, who spoke on the House floor in favor of the measure.

But other Democrats, including Representative Maxine Waters of California, the ranking member of Financial Services, said that the nation cannot afford to expose its financial system to greater risks.

“The financial crisis of 2008 wreaked untold havoc on the U.S. Economy,” she said. “This disaster which was intensified by the use of derivatives set back hardworking Americans for generations.”
With Wednesday’s vote, the House this year has passed eight bills that would roll back different provisions of the Dodd-Frank law.

On Tuesday, by a 254â€"166 vote, which also included 30 Democrats voting in favor, the House separately passed legislation that would make it harder for the Department of Labor to issue a rule that ensures investment advisors and brokers have the “fiduciary” interest of their clients in mind when they attempt to sell them life insurance policies and other services.