I alluded to this in my conference committee post, but the Wall Street Journal has more about the intra-Democratic fight over derivatives rules, with Collin Peterson the designated villain:

House Agriculture Committee Chairman Collin Peterson (D., Minn.) said lawmakers should adopt the House bill, while Senate Agriculture Committee Chairman Blanche Lincoln (D., Ark.) and other Senate Democrats said the Senate measure should be the main plank of the bill.

“End users … did not cause the financial crisis of 2008,” Mr. Peterson said. “A lot of them were the victims of it.” He said the Senate language was too complex and confusing.

It wasn’t clear how the division would be addressed. Democrats cannot afford to lose votes because of disagreement on substantive issues, given that few Republicans are expected to vote for the measure.

So where will this lead? Peterson is arguing about end-user exemptions – Lincoln’s bill isn’t completely clean of those, it’s generally tighter – but he does want his entire derivatives bill as a whole. That would lead to the elimination of Section 716, the spin-off of the swaps trading desks from the big banks.

As noted before, this is the heart of the bill. Walling off these risky casino markets from the public subsidies given commercial banks, as well as the real economy, is probably the biggest reform in the whole bill, which would make the financial system far safer than before. Most of this is all just gambling – less than 10% of the OTC derivatives market deals with end users. Putting trading desks in subsidiaries will reduce the size of this dangerous market, ensure its capitalization, and lower systemic risk. And importantly, Merkley-Levin is not a substitute:

But Merkley-Levin is not a substitute for section 716. It would still allow banks to deal and trade on behalf of their clients. Their derivatives business would still be backed and subsidized by Federal Reserve lending and FDIC guarantees and, in the event of another crisis, might require taxpayer bailouts to protect the banking functions of these huge enterprises […]

In summary, there are no substitutes for section 716 – no provisions that will accomplish what it does in terms of removing the subsidy enjoyed by (literally) a handful of institutions and ending the ongoing threat to the taxpayer that the guarantee of their derivatives business poses. Ignoring that threat would undermine all the other contributions to reform that the House and Senate bills provide.

The arguments against 716 hide the real reason – they make a lot of money for the five big banks which have a virtual monopoly over them. And the army of lobbyists certainly could use Peterson’s end-user concerns as a means to get it eliminated.

The good news here is that all the institutional players are on the same page. Unlike in the health care reform debate, the most grassroots-oriented groups like A New Way Forward and the most establishment-backed organizations like Americans for Financial Reform are saying exactly the same thing, highlighting the essential nature of this reform. The experts who aren’t working for the executive or legislative branch generally agree as well. That’s an essential component of a strategy for breaking through the very small window of opportunity offered by the conference committee. It’s very difficult for activists to influence that process, but they can’t do a thing without clear goals. Section 716 sits atop every single advocacy group’s wish list, and will be a part of all communications with members of the conference committee.

Still and all, it’s going to be tough to stop the forward motion that would lead to a compromised derivatives title without Section 716, unless some members basically tie themselves to the railroad tracks and demand it as a condition of their support. That letter should be circulating in the Senate right now if advocates want real success.