A group of high-profile Democrats and a top Republican on Wednesday launched a campaign to pressure Capitol Hill leaders to remove a provision in a must-pass government funding bill that would eliminate big banks' obligation to spin some of their derivatives business into separately capitalized subsidiaries.
"We had scores [of Democrats] that agreed with me and said they would not support this legislation if this stays in," Rep. Maxine Waters, D-Calif., told reporters at a press conference. "It should never be slipped into the [appropriations] bill. We shouldn't allow the biggest banks in this country to do this risky derivatives trading instead of doing the 'push out' that would put it into subsidiaries that don't have the protection of the [Federal Deposit Insurance Corp.]."
Known as the Lincoln Rule, after former Arkansas Democrat Sen. Blanche Lincoln, the statutory obligation was part of the Dodd-Frank financial reform law and requires big banks to make riskier credit derivatives trades in a separately capitalized unit. The aim of the provisions to ensure that a trading failure there would not have affected the institution's commercial bank division, which is backed by insured deposits and taxpayers through the Federal Reserve's discount window. This kind of trading led to trouble for American International Group (AIG) during the early stages of the financial crisis.
A provision removing the measure was added to a government spending bill as part of a compromise between Democrats and Republicans that includes hikes in appropriations to the Securities and Exchange Commission and Commodity Futures Trading Commission for their enforcement budget.