Thank you. Possible CDS Changes - Congress Bill
Deal seen to keep Lincoln swaps plan in bank bill
2:39pm EDT
* "Clarified" Lincoln plan will be in final bill-aides
* Changes to plan seen on Fed rules, possibly capital
* Business-friendly Dem lawmakers group wants plan dropped
* Pro-reform group says plan is a "critical" change
By Kevin Drawbaugh and Charles Abbott
WASHINGTON, June 17 (Reuters) - Final Wall Street reform legislation will include a controversial plan from Senator Blanche Lincoln to insulate banks from risky swap dealing, but only after it is further "clarified," aides said on Thursday.
A deal is being worked out, with terms still under negotiation by lawmakers and the Obama administration, said congressional aides and someone close to the talks.
A key element of the agreement is bolstering related Federal Reserve regulations that would isolate banks from new swap dealing affiliates called for by the plan, aides said.
Other factors involve government protections for banks whose swaps businesses get into trouble; finding ways for banks to capitalize the new affiliates; and Lincoln's bid to win reelection in November in Arkansas, senior aides said.
JPMorgan Chase (JPM.N: Quote, Profile, Research, Stock Buzz), Bank of America (BAC.N: Quote, Profile, Research, Stock Buzz) and other commercial banks could be hardest hit if the Lincoln plan is approved, Citigroup analysts said in a report this week.
Major investment banks such as Morgan Stanley (MS.N: Quote, Profile, Research, Stock Buzz) and Goldman Sachs (GS.N: Quote, Profile, Research, Stock Buzz) could be better positioned to adjust to structural changes that would ensue, the report said.
The Lincoln plan "remains one of the most critical, structural reforms left standing in the Wall Street reform bill," said Heather Booth, director of Americans for Financial Reform, a group that advocates tougher financial regulation.
"Wall Street lobbyists have thrown everything they have at it because they want to keep using Americans' deposits and federal dollars to fund their reckless gambling," she said.
Some progressive Democrats in the Senate and the House support Lincoln's plan, but a long list of business-friendly Democrats registered opposition to it on Wednesday.
In a letter to leaders of a Senate-House conference committee drafting the Wall Street reform bill, 43 members of the New Democrat Coalition called for killing the plan, saying it would "increase systemic risk by forcing derivatives transactions into less regulated and less capitalized institutions and impede effective regulatory oversight."
Republicans, who have little to say about the reform bill at this stage, probably would not support the Lincoln plan no matter how it is modified, said a senior Republican aide.
PLAN TARGETS SWAPS
Swaps are derivative financial contracts that let their users hedge against risks of changing interest rates, exchange rates or, in the case of credit default swaps, the likelihood of a borrower defaulting on its debts.
The unregulated $615-trillion market for over-the-counter derivatives, which are not traded on exchanges and include off-exchange swaps, is dominated by Goldman, JPMorgan, Morgan Stanley, Bank of America and Citigroup (C.N: Quote, Profile, Research, Stock Buzz).
OTC derivatives, particularly CDS, were widely blamed for aggravating the 2007-2009 credit crisis by rapidly spreading it across the financial system via the vast web of global connections the market has fostered among financial firms.
Lincoln proposed that banks benefiting from government protections be made to choose between banking and swap dealing. Her plan would effectively force banks to spin off their swap dealing desks into affiliates with separate balance sheets.
That would be costly to the banks. They would have to give up the lucrative profits they get from dealing, raise new capital for the affiliates and deal with the complex logistics of moving dealing operations from one unit to another.
Separating their dealing desks would also raise banks' cost of capital, possibly putting U.S. banks at a disadvantage versus European competitors, said the Citigroup analysts.
Still, an aide close to the discussions on the plan said it would let banks hold onto the value of their swap dealing desks by keeping them inside the bank holding company.
In addition, aides said, raising more capital for the new affiliates would add to a holding company's overall capital cushion -- a goal shared by all involved in the reform debate.
When Lincoln first unveiled her proposal earlier this year, it was widely interpreted as calling for banks to completely separate themselves from their swap trading desks.
On Monday, she issued a "clarification" that said banks could spin off their swap dealing operations into separately capitalized subsidiaries still within their holding companies.
She also said banks could continue to be swap market participants, using off-exchange derivatives to hedge their own risks and offering the same services to customers.
(For a Factbox on new tweaks to Lincoln's plan, double-click on [ID:nN14223826]) (Additional reporting by Caren Bohan; Editing by Dan Grebler)
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