A MASSIVE IMPROVEMENT:

Deal May Force Trading-Desk Spinoff (GREG HITT And DAMIAN PALETTA, 4/26/10, WSJ)

The tentative agreement reached by two key Democrats Sunday on a plan to crack down on trading in derivatives would potentially force banks to spin off their operations that trade the exotic financial instruments.

The plan, worked out by Senate Banking Chairman Chris Dodd (D., Conn.) and Senate Agriculture Chairwoman Blanche Lincoln (D., Ark.) closely follows legislation—originally written by Ms. Lincoln—designed to boost federal oversight and transparency of the derivatives market. [...]

Supporters say Ms. Lincoln's proposal is the best way to prevent Wall Street banks from leveraging deposit insurance and other government support to fuel risky speculation, which played a part in the market collapse in 2008.

Under the deal, the derivatives portion of the bill would include a provision that would force banks to spin off their derivatives trading desks to be eligible for federal financial assistance from the Federal Reserve and Federal Deposit Insurance Corp. That would ensnare most big Wall Street players.

The Senate proposal is more aggressive than the regulatory overhaul approved by the House last year, which did not encourage banks to spin off trading operations. The issue is likely to be fought again on the Senate floor, where some Republicans and perhaps some Democrats including Sen. Kristen Gillibrand of New York are expected to attempt to kill the provision, once debate opens on the broader legislation.

That's a reform the GOP should support, even if other parts of the bill are problematic.

Posted by Orrin Judd at April 26, 2010 5:28 AM