This was a vote on an amendment offered by Rep. Lynch (D-MA) to H.R. 4173, a major financial reform bill which implemented the most significant changes in the regulation of the financial industry since The Great Depression. The amendment was designed to prevent a few major financial institutions from controlling the sale and transfer of all “derivatives”; these are sensitive financial instruments whose value is tied - - or derived - - from other instruments. An example is investment whose value is dependent on the amount of mortgages that are paid in a timely manner. Problems with large amounts of these derivatives had contributed significantly to the financial crisis the country recently faced.
Lynch began his statement in support of the amendment by noting that H.R. 4173 “would require over-the-counter trading to be conducted through clearinghouses, which are set up to police derivatives trading and to make sure there is sufficient protection from the reckless behavior that these ‘too big to fail’ banks have engaged in. Clearinghouses are a good idea. Think of them as financial police stations.” He then went on to note that “97 percent of the derivatives trading in this country is controlled by just five banks (and four) . . . of those five banks were top recipients (of federal bailout money). During their recent financial meltdown, these same banks engaged in very risky behavior involving complex derivatives, which endangered the entire financial system.”
Lynch said that, without his amendment: “The big banks would be allowed to own and control the clearinghouses and to set the rules for how their own derivatives deals are handled.” He noted that his amendment “would prevent those big banks . . . from taking over the police station--these new clearinghouses.” Rep. Frank (D-MA), who chairs the Financial Services Committee that developed H.R. 4173, supported the amendment. Frank said he disagreed “with the premise that the large financial investment houses and large financial institutions have earned the degree of trust that our voting against this amendment would require . . . If you let people who have a financial interest in there not being clearing be in charge of clearing, it would take an extraordinarily selfless group of people not to give in to temptation . . . The fact is that if you reject this amendment, you are giving people, who have an incentive to make these things not work well, control over them.”
Rep. Price (R-GA) opposed the amendment. He said “it would significantly limit competition and undermine the ultimate goal that all of us ought to have, and that is to make certain that the market is, in fact, able to work for more individuals across this land.” He added that the “New York Stock Exchange . . . Securities Industry and Financial Markets Association (and other similar groups) . . . oppose this amendment because they believe strongly that it will decrease the choices available to the American people . . . What this amendment does (is say) . . . government knows best, that we ought to limit the ability of creative thinking and jobs to be formed out there across this land, because government knows best. We are going to limit the choices available to the American people.”
Rep. Garrett (R-NJ) also argued against the amendment saying it “could very well exacerbate risk by forcing more derivative transactions . . . to fewer clearinghouses, basically concentrating risk and doing the opposite of what the American public wants, to avoid risk burdens and additional bailouts.” Rep. McMahon (D-NY) also opposed the amendment. He argued: “The way to deal with concerns about conflicts of interest is through changes in governance, not through restricting ownership and investments.” He went on to say: “The underlying bill grants regulators the strongest authority to police the markets . . . .” He also claimed that “the proponents of this amendment are using the legislative process to promote one marketplace over the others . . . We are here today to reform American financial services and our regulatory structure, not to drive companies out of business . . . .”
The amendment was approved by a vote of 228-202. Two hundred and ten Democrats, including a majority of the most progressive Members, and eighteen Republicans voted “aye”. One hundred and fifty-six Republicans and forty-six Democrats voted “nay”. As a result, language was added to the major financial reform bill preventing a few major financial institutions from controlling the sale and transfer of derivatives.