WASHINGTON — The Senate Agriculture Committee on Wednesday approved by 13-8 tough new curbs on financial derivatives, including a ban on most direct bank trading of the tools, which played a big role in exacerbating the 2008 financial crisis.
Derivatives are financial bets between private parties. Their value is derived from movements of an underlying asset. Some derivatives, such as oil futures contracts, are regulated and trade on an exchange.
Congress is trying to address the over-the-counter products that are often called swaps because one party wants to swap a risk it’s assumed to another party that’s willing to shoulder that risk for a fixed price. Swap deals cover everything from movements in the prices of contracts for delivery of barrels of oil or bushels of wheat to changes in the value of the dollar versus other currencies. These swaps take place off regulated exchanges.
The ban would require banks to spin off divisions that trade in the lucrative but opaque financial instruments into free-standing subsidiaries.
The vote sent a strong signal that not only are Democrats eager to take bold steps to revamp the regulatory process, but that Congress may enact a broad overhaul of Wall Street practices.
Sen. Charles Grassley, R-Iowa, joined 12 Democrats in approving the new limits, the first time this year that a Republican senator has sided with the opposition on sweeping financial legislation. Grassley said he voted for the measure because “transparency is the right policy,” though he warned that he might vote against the final bill.
Other Republican senators talked in conciliatory terms, an indication that they’re feeling trapped between constituents demanding action against Wall Street excesses and their financial industry donors.
President Obama will give the effort a push today, when he travels to New York to call for tougher regulation of derivatives. The speech, White House press secretary Robert Gibbs said, will strike a balance between “calling out obscene bonuses” and “also saying that we don’t want to overly or unduly burden private enterprise and American business from operating.”
The derivatives vote was the final, and probably the most difficult, hurdle for the bill before it reaches the full Senate, perhaps as soon as today. The derivatives curbs, which would be tougher on banks than those the House passed last year, are expected to be added to broader legislation from the Senate Banking Committee that would change how financial institutions are regulated.
“Wall Street’s interests are different from Main Street’s. … Wall Street’s interest is to keep inefficient markets. This (legislation) is about promoting efficient markets,” said Commodity Futures Trading Commission Chairman Gary Gensler, who worked at Wall Street financial giant Goldman Sachs for 18 years.