House offers compromise on derivatives, banks could do business in some complex securities

House offers compromise on derivatives

WASHINGTON — House lawmakers sought to break a logjam on financial negotiations by proposing to limit the type of derivatives business banks can transact. The plan reached for a middle ground with a tougher Senate proposal.

The House offer was reached after daylong talks Thursday brokered by Obama administration officials, House lawmakers, and Sen. Blanche Lincoln, D-Ark.

Lincoln was the leading advocate of a Senate provision that would have forced banks to spin off all their derivatives business into subsidiaries that would be separately funded.

Banks, House moderate Democrats and members of the New York congressional delegation all opposed the measure.

The compromise offer would force banks to spin off the riskiest derivatives trades. It would permit banks to keep some of their lucrative business based on trades in derivatives related to interest rates, foreign exchanges, gold and silver.

THIS IS A BREAKING NEWS UPDATE. Check back soon for further information. AP’s earlier story is below.

WASHINGTON (AP) — Lawmakers negotiated behind closed doors late into the evening Thursday, seeking a compromise on a contentious Wall Street restriction that would force large bank holding companies to spin off their lucrative derivatives business.

Obama administration officials were trying to broker talks between Sen. Blanche Lincoln, D-Ark., the leading advocate of the regulation, and moderate House Democrats and members of the New York congressional delegation opposed to her plan.

“We’re listening to the concerns,” Lincoln said.

The provision stood out as the last major sticking point in a sweeping overhaul of financial regulation. Congressional leaders were eager to wrap the bill up Thursday, with hopes of getting final House and Senate passage before July 4.

“There have been conversations all day,” said Rep. Barney Frank, the chairman of the House-Senate panel assembling the bill. “They are a lot closer than they were, and I believe we will get a deal.”

But Rep. Collin Peterson, D-Minn., the chairman of the House Agriculture Committee and an ally of Lincoln’s on the provision, was more downbeat after participating in some of the talks.

“They’re not making a lot of progress,” Peterson said. “Somehow or another we have to do something.”

Aiming to clear a deadlock on another potential obstacle, Sen. Chris Dodd, D-Conn., chairman of the Senate Banking Committee, proposed limits on the ability of banks to carry out high-risk trades or invest in hedge funds and private equity funds.

The House-Senate panel has been working into the evening over the past two weeks to resolve differences between the two bills. The legislation aims to avoid a recurrences of the 2008 financial meltdown by requiring a regulatory council to look for threats to the system, by creating a consumer protection bureau, forcing large failing firms to liquidate and policing financial instruments that have been largely unregulated.

But Dodd and Frank left the most contentious issues for last. Lobbyists, government regulators and administration officials ducked in and out of the panel’s meeting room, holding sidebar meetings with lawmakers over details in the bill.

The derivatives issue was proving to be the most nettlesome. Derivatives are complex securities often used by corporations to hedge against market fluctuations. But they also have become speculative instruments for financial institutions, the most notorious of which were credit default swaps that hedged against loan failures.

Lincoln would force large bank holding companies — firms like JPMorgan Chase and Bank of America — to place their derivatives business in subsidiaries with their own source of funds. Banks object, saying it would cost them billions and send derivatives trades to foreign markets.

Lincoln, however, managed to win a primary challenge in Arkansas with ads depicting her as tough on Wall Street, after liberal critics had depicted her as being too cozy with banks. She still faces a difficult election in November.

Her talks with House Democrats focused on potential compromises that would place limits on some, but not all, derivatives transactions involving banks.

After hours of private negotiations, Dodd appeared to have found some common ground on other banking trade limits. The Obama administration has pushed for the restrictions on bank trades, a proposal especially championed by former Federal Reserve Chairman Paul Volcker.

Dodd’s proposal would permit banks to carry out trades designed to hedge against market fluctuations. The proposal also would bar banks from betting against their clients on certain investments deals.

Bank holding companies would be allowed to invest in hedge funds and private equity funds but would be limited to investing no more than 3 percent of their capital in the hedge fund or private equity fund. There are no such conditions on banks now. Negotiations were ongoing.

House and Senate negotiators were checking off agreements on smaller differences between the bills.

They agreed on new standards for what banks keep in reserve to protect against losses, carving out a grandfather exception for banks with assets of less than $15 billion. The Securities and Exchange Commission has been working on new regulations and the negotiated provision requires the SEC to consider the result

Ending a protracted fight, senators and House members agreed to authorize the SEC to adopt rules that give shareholders of publicly owned companies the right to nominate candidates for corporate boards of directors. They also agreed to require regulators to study whether stock brokers should be more accountable for the advice they give clients and use the study results in writing new rules.

In another side skirmish, big banks succeeded in a last-ditch lobbying effort to kill a House proposal to add ailing mortgage giants Fannie Mae and Freddie Mac to the type of firms that would be subject to liquidation at financial industry expense.

The government took over Fannie and Freddie in 2008 after they suffered heavy loan losses in the housing crash. Their collapse has cost $145 billion and the Obama administration has pledged to cover unlimited Fannie and Freddie losses through 2012, lifting an earlier cap of $400 billion.