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

Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play
Index Last Change % Change
Dow 17,973.47 -96.93 -0.54%
Nasdaq 4,950.95 -65.98 -1.32%
S&P 500 2,097.86 -16.63 -0.79%
Treasuries 2.19 0.05 2.53%
Data as of 11:30am ET
Company Price Change % Change
Bank of America Corp... 16.57 0.13 0.79%
Apple Inc 126.80 -1.90 -1.47%
Microsoft Corp 47.91 -0.33 -0.69%
Intel Corp 32.85 -0.34 -1.02%
Regions Financial Co... 10.10 0.12 1.25%
Data as of 11:16am ET
Sponsors

Sections

Video game developer EA is one of the hottest stocks on Wall Street. It has a Star Wars game coming out in November and it's also minting money from sports games like Madden and FIFA. More

President Vladimir Putin announced a new reserve fund for the BRICS nations that could attempt to rival the IMF. More

Harrison Brammell is an 11-year-old fifth grader who is obsessed with coding and live-streaming. And he's good too. More

The London-based startup is on a quest to democratize access to technology and coding with its computer company. More

A global survey of full-time employees finds workplace flexibility is a very desired feature in a job. And lack of it is among workers' top reasons for quitting. More