Obama Defends Senate Reform Bill

These officials said it was consistent with a white paper on financial services reform released by the administration last year. For example, financial institutions engaging in “risky derivative” deals would not be eligible for federal bailouts under the proposed bill.

That provision was clearly linked to AIG, because the Federal Reserve Board was forced to provide what was up to $182 billion at one point to prevent the insolvency of AIG in September 2008, most of it because AIG had provided credit default swap protection of up to $2.8 trillion in mortgage-backed-securities, some of it backed by subprime loans.

All of these trades were unhedged. Some of the Fed bailout is still outstanding as AIG continues to unwind its financial products group.

Another provision of Lincoln’s bill would require a large segment of the derivatives market to trade through clearinghouses, which are intermediaries between buyers and sellers that make sure both parties have enough capital. Clearinghouses require participants in a transaction to post capital and would cover losses in case a participant in a derivatives contract can’t pay up.

The bill would exempt so-called commercial “end users” of derivatives products, such as manufacturers, airlines and other commercial companies, from having their transactions go through costly clearinghouses.

That would affect life insurance companies, which under two financial services bills would have an exemption for use of so-called “custom derivatives” to hedge the risk of their portfolios.

According to an official of a large insurance company, that would impose an additional layer of regulation on their hedging activities. The issue is a “major concern” to life insurance companies, he said.

Currently, reform legislation that passed the House last December and which was reported out by the Senate Banking Committee in late March would provide an exemption for custom derivative transaction entered into by insurance companies, albeit by different means, according to several industry officials.

In his comments, President Obama said he hoped to find “common ground” with Republicans, although all 40 Senate Republicans have signed a pledge to oppose the bill in its current form. The caucus signed the pledge at the request of Sen. Mitch McConnell, R-Ken., Senate minority leader.