Our Terms of Service and Privacy Policy have changed.

By continuing to use this site, you are agreeing to the new Privacy Policy and Terms of Service.

Bernanke raises concerns about swaps ban

By Jennifer Liberto, senior writer

WASHINGTON (CNNMoney.com) -- Federal Reserve Chairman Ben Bernanke said Wednesday he has concerns about a signature piece of Senate Democrats' Wall Street reform package that cracks down on complex financial products.

Bernanke wrote about the consequences from a congressional ban preventing banks from trading the complex financial products, called derivatives, in a letter to key lawmakers.

"Forcing these activities out of insured depository institutions would weaken both financial stability and strong prudential regulation of derivative activities," Bernanke wrote to an author of the measure, Sen. Christopher Dodd, D-Conn.

Dodd worked with Sen. Blanche Lincoln, D-Ark., on the measure, including the swaps ban, which ranks among the top hang-ups that could threaten final passage for the overall Wall Street reform bill.

Progress on the bill has been slow going, and the Senate will continue debating amendments at least through early next week, Dodd said Thursday.

The Fed chair's concerns about the swaps ban are similar to those raised by other high profile regulators -- former Fed chairman Paul Volcker and Federal Deposit Insurance Corp. Chairman Sheila Bair. They all stopped short of blasting the measure.

The tough crackdown in question is the brainchild of Sen. Lincoln, who is facing a contentious Democratic primary in Arkansas on Tuesday in her bid for re-election. The Senate isn't expected to propose changes to the measure until after Tuesday, congressional aides and lobbyists say.

Congress generally wants to get tougher on derivatives, which are currently traded with no oversight and were a key reason for the taxpayer bailout of American International Group (AIG, Fortune 500). But lawmakers disagree about how much to regulate them.

The measure banning bank swaps goes farther than the so-called Volcker rule, named for the former Fed chief, that would only block some banks from doing such trades for their own purposes and accounts, called "proprietary trading."

The Lincoln proposal blocks banks from all derivatives if the banks want access to cheap emergency loans that the Federal Reserve can make as lender of last resort.

Bernanke said in the letter that banks use derivatives to shed risk that can arise in deals they make over interest rates, currency and other credit risks.

"Use of derivatives by depository institutions to mitigate risks in the banking business also provides important protection to the deposit insurance fund and taxpayers as well as to the financial system more broadly," Bernanke wrote.

A House bill that passed in December would allow all banks to trade derivatives in a more transparent way. However that bill also allows some trades between some banks and certain companies, such as airlines, to continue without regulation.

But Senate Democrats are tougher on derivatives, in the aftermath of fraud charges that the Securities and Exchange Commission levied against Goldman Sachs (GS, Fortune 500) for selling a complex mortgage-related derivative to investors while failing to tell them that a hedge fund was betting against the product.

When asked about negotiations on the derivatives piece on Thursday, Dodd said he understood that discussions were ongoing, but he wasn't involved in them. To top of page

Search for Jobs

Index Last Change % Change
Dow 18,202.96 57.25 0.32%
Nasdaq 5,298.26 40.86 0.78%
S&P 500 2,147.75 6.59 0.31%
Treasuries 1.77 0.03 1.55%
Data as of 12:39pm ET
Company Price Change % Change
AT&T Inc 36.86 -0.63 -1.69%
Bank of America Corp... 16.76 0.08 0.51%
Time Warner Inc 87.48 -2.00 -2.23%
Chesapeake Energy Co... 6.36 -0.32 -4.79%
Microsoft Corp 60.40 0.75 1.25%
Data as of 12:24pm ET


The combo brings together AT&T's wireless and Internet business and DirecTV with Time Warner programming, including CNN, HBO and Warner Bros. More

Wages have plummeted for Donald Trump's key supporters, so-called "middle skill" workers who are often in manufacturing, More

Microsoft is raising prices in the U.K. by whopping 22%, in response to the collapsing value of the pound. More

The University of Illinois partnered with Coursera to launch one of the most affordable online MBA programs yet. More