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Is Lincoln Quietly Gutting Her Derivatives Plan?

June 15, 2010 - by Donny Shaw

Yesterday, Sen. Blanche Lincoln [D, AR] issued a “term sheet” that her spokesperson said sought to clarify the intent of her proposal, Sec. 716, to ban derivatives desks at bank-holding companies from accessing federal subsidies via the Fed discount window and FDIC insurance. Most discussion of the term sheet was focused on the two-year phase-in proposal and a somewhat ambiguous study that would be required, but looking it over myself, I think it may be more of a gutting than a clarification.

Since I’m on a bus and typing in my seat is pretty uncomfortable, I’m going to be lazy here and quote from an email I wrote last night to a group of friends and bloggers who are working to digest these developments:

I don’t understand how this new compromise can be considered the same provision if it is going to allow Fed Act Section 13(3) actions for swap entities. Sec. 716 as it exists right now is called “the prohibition against federal government bailouts of swap entities.” Section 13(3) of the Fed Act says that the Fed can give discount money and loans to anyone they want when they deem it is an “exigent and unusual circumstance.” Sounds like a bailout to me, and, in fact, it was used repeatedly in 2008-2009 to authorize all kinds of Fed bailout actions.

The text of Lincoln’s “term sheet” is: “New FED Section 13 (3) Broad Based Federal Assistance to Swap Entities would be ok.” And here’s a direct link to the revised 13(3):

It doesn’t fundamentally change it.. seems to just adds some broad language that can easily be skirted (esp. in a “crisis” situation), new oversight/accountability measures, and a Treasury approval requirement.

I’ll be looking at this more, but I wanted to get it out there a.s.a.p. as everything is moving very fast now with financial reform. Thoughts?

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