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Cantwell Flips, Will Support FinReg

Last night, Maria Cantwell announced her support of the Dodd Frank financial reform bill, citing a letter from Commodity Futures Trading Commission chief Gary Gensler ensuring her that the derivatives title will be rigorously enforced.

In the letter, Gensler says that the legislation, in his view, mandates clearing and exchange trading for “standardized over-the-counter derivatives” as well as comprehensive regulation. Gensler’s CFTC will be largely responsible for enforcing the regulations and the clearing requirements, and his assurance that the bill explicitly requires such clearing and exchange trading basically means that he will enforce the law and not allow uncleared swaps to trade. That was Cantwell’s main problem with the Senate version of the bill, a fear that the clearing and exchange trading requirements carried no enforcement.

This doesn’t mean that every derivative will be exchange traded or cleared. Commercial end-users are given what Cantwell calls a “narrowly-crafted exemption,” and certain customized swaps get exempted as well. But Cantwell was satisfied that Gensler wrote that the vast majority of derivatives – 75 to 85% – will have this kind of oversight.

Here’s some of Cantwell’s statement:

“I will vote in support of the conference report because it makes great strides toward our ultimate goal: bringing all standard derivatives onto exchanges and clearinghouses, with aggregate position limits and strong anti-manipulation tools,” Senator Cantwell said. “Since even before the financial crisis of fall 2008 I have been fighting to bring the $600 trillion derivatives market out of the dark, unregulated betting hall where it has existed and into the bright light of transparency and regulation. This legislation is not perfect, and I will continue to push for even bolder action – including a return to the Glass-Steagall separation of commercial and investment banking – to reign in Wall Street, put an end to the concept of ‘too-big-to-fail.’ But this bill makes significant strides toward preventing the kind of financial meltdown that we saw in the fall of 2008.”

Cantwell did get some provisions in the conference committee that will fully enforce the derivatives title, double the penalties for any violations, set “aggregate position limits” to prevent speculation, and close the “London Loophole,” which I’ll let Cantwell explain:

In the legislation passed by the Senate, foreign boards of trade were still allowed to operate without registering with the CFTC and allowed to escape full regulation. This made the position limits and other key provisions meaningless.

The conference committee adopted an amendment by Senator Dianne Feinstein, which Cantwell cosponsored in the Senate, to fully close the London loophole by giving the CFTC authority to require registration of Foreign Boards of Trade that provide direct access to U.S. customers. Closing this loophole will prevent billions of dollars in speculative trading from driving up U.S. prices, as they did with oil prices in the summer of 2008. That means lower prices for U.S. business and consumers.

All of this begs the question: why in the hell did the conference committee give Scott Brown basically everything he wanted? Because Brown’s vote is now irrelevant. Cantwell didn’t support cloture last time around, but it received 60 votes then. So all things being equal, her support theoretically gives the Senate 61 votes to end debate on the conference report (Politico wins the morning by getting the math completely wrong). Brown could turn around and vote no and, provided the Democratic replacement Senator from West Virginia goes along, it wouldn’t matter. Sens. Snowe and Collins would offset Russ Feingold and provide the margin of victory. Collins and Snowe both had reservations about the bank tax, but never expressed an opinion on the hedge fund loophole put into the Volcker rule, allowing banks to invest up to 3% of Tier One capital into private equity or hedge funds. If Cantwell’s issues were largely resolved by the conference committee, why give up a huge loophole for the benefit of a non-essential Scott Brown vote?

The answer that’s been expressed to me is that some top Democrats wanted that loophole as well, particularly Chuck Schumer and John Kerry. They wanted Scott Brown to take the lead on it, but they were right there with him behind the scenes. So they played this charade where Brown’s vote was consequential to passing the bill, and the concessions made simply to get vote #60. Except that wasn’t true. Maria Cantwell was vote #60. And she’s on the bill.

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David Dayen

David Dayen