New rules for Wall Street must clear final hurdles

In final push on Wall Street rules, Congress tackles sticking points that could gum up reform

WASHINGTON (AP) -- They are the sticking points that would gum up the Wall Street overhaul. From big banks' exotic trades to the plastic in people's wallets, it only take a few of the most contentious issues to upend a careful political equilibrium as lawmakers try to blend House and Senate bills into a single rewrite of banking regulations.

The final measure, which President Barack Obama wants by July 4, is intended to prevent another financial crisis like the 2008 meltdown, which triggered a deep recession.

Rep. Barney Frank, chairman of a panel resolving differences in the two bills, and Sen. Christopher Dodd, who shepherded the Senate's measure, must fend off industry efforts to dilute the final legislation. And they will need to hold together a fragile Senate coalition that included only four Republicans.

Typically, legislation gets watered down in the Senate. This time, the Senate version emerged tougher than the House bill. Frank, D-Mass., agreed to make the Senate bill the base, with some minor House modifications.

There's momentum behind the Senate version.

"Throughout this process you have seen a desire by members not wanting to be seen voting with the banks," said Edward Mills, a financial policy analyst at FBR Capital markets.

The financial industry is no stranger to the lawmakers working on the legislation.

At least 56 industry lobbyists have served on the personal staffs of the 43 Senate and House members who will have a hand in shaping the bill over the next two weeks, according to an analysis by Public Citizen and the Center for Responsive Politics, two government watchdogs.

What's more, the center found that lawmakers on the committee settling differences between the competing House and Senate versions have received more than $112 million over two decades from political action committees or employees of industries affected by the legislation.

"It's going to be very difficult to stop special interests, working through some members of the conference, from inserting weakening provisions," said Travis Plunkett, legislative director of the Consumer Federation of America.

A look at the main issues to be settled:

Derivatives:

These are the complex, unregulated securities that many corporations typically use as a hedge against market fluctuations. For instance, an airline may try to soften the cost of a potential rise in fuel prices by betting in the derivatives market that fuel prices will rise. But derivatives have become instruments for risky speculation. The legislation would require that they be traded in regulated exchanges.

The toughest Senate provision would force banks to shed most of their lucrative derivatives business -- the trades they conduct for themselves and the markets they create for clients would have to be spun off into separate subsidiaries.

The proposal's chief advocate is Sen. Blanche Lincoln, D-Ark., who survived liberal and labor attacks during a hard-fought primary runoff largely by spotlighting her anti-Wall Street stance.

The Obama administration and bank regulators, including Federal Reserve Chairman Ben Bernanke, have said her proposal goes too far. Advocates say it would limit the type of risky bank behavior that led to the financial crisis.

Large banks are simply apoplectic, watching as it gains strength over time.

Lincoln's political success had two effects: It boosted her strength as a member of the House-Senate conference committee working on a compromise and it showed other Democrats that her Wall Street criticism worked in a tough political year for incumbents.

With seven Senate Democrats and five Senate Republicans on the conference committee, Frank and Dodd, D-Conn., can't afford to lose her vote.

Volcker Rule:

After the Great Depression, depository banks and investment banks had to be separate and independent enterprises. Congress and the Clinton administration changed that in 1999. Now, huge financial institutions such as Goldman Sachs, Morgan Stanley, JPMorgan Chase, Bank of America combine commercial and investment banking operations.

A Senate plan known as the Volcker rule, after former Fed Chairman Paul Volcker, would prohibit banks from betting on the markets with their own money. It would give regulators the authority to determine the best way to put into place that prohibition, which would apply to all securities trades, not just derivatives.

Unlike Lincoln's plan, it would not stop banks from creating trading markets for their clients.

Volcker is the proposal's leading champion. But he and several Democratic lawmakers want to strengthen the Senate bill by giving regulators less latitude to modify the prohibition. The idea has been pushed by Democratic Sens. Carl Levin of Michigan and Jeff Merkley of Oregon.

Prompted by a Securities and Exchange commission case against Goldman Sachs, their plan also would prevent financial firms from betting against securities they assemble for their clients.

Large banks see billions of dollars in trades slipping away. They prefer a House plan that merely says regulators could ban such trades. But Frank last week dashed those hopes.

"The general direction that Sens. Merkley and Levin were moving in is a direction that a lot of people are supportive of," he said. "The final version, we'll see. But it will be tougher than the House."

Debit card fees:

People in the U.S. use debit cards more frequently than credit cards. But their use costs merchants money: For every swipe, merchants pay 1 percent to 2 percent to banks and credit card networks such as Visa and MasterCard.

A proposal that passed the Senate 64-33 requires the Federal Reserve to limit those fees, and it has created a lobbying donnybrook between banks and retailers.

Most of the fees go to banking giants such as Bank of America and JPMorgan Chase. But the face of the lobbying effort has been small community banks and credit unions that say they will be disproportionately hurt if they lose such fees.

The proposal specifically excludes banks with assets under $10 billion. Officials at small banks say their banks still would have to lower fees to compete with bigger banks or drop their debit card programs.

Though the House did not take up the measure, the Senate vote sent a strong signal.

"When you have 64 senators voting for something like that after a lot of controversy it's unrealistic to think it's going to go away," Frank said.

Analysts say the measure could be amended, perhaps by expanding the conditions that the Fed would have to consider in setting the fees.

Consumer protections:

The final legislation will create a government consumer financial protection entity. This development was once considered the most contentious element sought by the administration.

The House bill exempted accountants, tax preparers, real estate agents and auto dealers from bureau oversight. The Senate bill has no such exceptions.

Auto dealers have lobbied fiercely to be excluded from the law's reach, arguing that they assemble loans but don't administer them. Obama has fought back, elevating the issue to a test of White House strength.

The Senate passed a resolution instructing negotiators to carve car dealers out of the bill, but that guidance isn't binding.

Consumer groups also want to strike a provision added by Sen. Olympia Snowe, R-Maine, that would require the bureau to consult with small businesses before proposing rules that could affect them. That would give businesses such as payday lenders a chance to affect rules before they are even proposed, according to thre groups.

That is a difficult area for Frank and Dodd because Snowe was one of just four Republicans who voted for the bill. Dropping her provision could give her cause to oppose it.

Online:

House Financial Services Committee: http://tinyurl.com/y4uercn

Senate Banking, Housing and Urban Affairs Committee: http://banking.senate.gov

Consumer Federation of America: http://www.consumerfed.org

Public Citizen: http://tinyurl.com/2a5zyn9

Center for Responsive Politics: http://tinyurl.com/23qbmwo

Brazil to your bank: How derivatives circle globe

How a derivative, little-understood but key to financial system, circles the world

NEW YORK (AP) -- Jonis Assmann, who grows soybeans on a farm in Brazil, is not sure exactly how financial derivatives work. But he's counting on them to help bring in next year's harvest.

Assmann is perpetually worried he will run short of cash if prices for his crops fall. So he tries to pay for some of his supplies at the start of the growing season with a fixed amount of soybeans that will be collected at the end.

His suppliers don't want to take on the risk of falling prices, either. But last month Philadelphia chemical maker FMC Corp. agreed to send Assmann all the insecticides and herbicides he needs in exchange for a third of his expected harvest.

Making the barter possible: A separate derivative that FMC, without Assmann's knowledge, got a bank to design. That side bet is designed to make sure FMC won't lose a penny if soybean prices fall.

"They seem very complicated," Assmann, 39, said when told about the derivative. "A poultry company here lost a lot of money in derivatives. I don't fully understand them."

Neither do most people, even though trade in many things we buy every day would slow or even stop without them.

Derivatives are private bets between two parties on how the value of assets like crops or measures like interest rates will change in the future. Most aren't traded on exchanges, and they're hard to value.

There's a derivative for nearly everything. You can bet that the Standard & Poor's 500 index will be higher in a year or the dollar will fall in value. You can bet that people of a certain age will die off faster than expected. A few creative financiers once devised a derivative that allowed you to bet on the value of future royalties from old David Bowie songs. Others came up with one to bet on how many basketball games the Utah Jazz would win in a year. And, yes, you can bet on soybeans in all their varieties -- crushed or ground, solid or oil, normal-sized or miniature.

For all the positives that investors see in derivatives, the investments can also be dangerous. Dubbed "financial weapons of mass destruction" by billionaire Warren Buffett, derivatives have been behind nearly every recent financial blowup from the bankruptcy of Orange County, Calif., in 1994 to the collapse of the housing market.

Two years after panic on Wall Street brought the economy to near-collapse, Congress is finalizing a sweeping overhaul of laws governing the financial services industry. Legislation is pending that would regulate derivatives for the first time -- and could make derivatives like FMC's difficult to execute. House and Senate negotiators will begin crafting the final bill this week. President Barack Obama hopes to sign it into law by July 4. Both the House and Senate versions would require users or middlemen to set aside money in case their derivatives generate big losses.

Supporters of the legislation say regulation is needed to prevent another meltdown. But opponents say regulation will make it too expensive for companies such as FMC to hedge their risk and will throw sand into the gears of commerce. That's because derivatives affect the price of nearly everything we buy -- a steak at a restaurant, bread at the supermarket, gas for our cars.

"There isn't a thing you use that isn't somewhere hedged by derivatives," said Lee Prisament, a doctor who ditched medicine 20 years ago to design derivatives at banks like JPMorgan Chase & Co. "The average Joe benefits from them without even knowing it."

Derivative contracts worldwide have a value of $700 trillion, or 10 times the worth of all the goods and services produced in the world in a year. Speculators are behind much of this market. But derivatives' popularity also reflects fear at companies that they could get walloped by unexpected changes in the prices of things they buy or sell.

In the case of the Brazilian soybeans, the fear showed up in a most unlikely person.

Scion of a proud farming family of German descent, Assmann greets visitors with a firm handshake and exudes confidence when talking about business. He boasts that he's "usually 80 percent right" guessing where soybean prices are heading. But that other 20 percent can sock him with big losses.

Five years ago, Assmann was caught by surprise when prices for soybeans dropped on world markets. He lost $1 million, had to lay off a dozen workers and found himself scrambling for cash to pay suppliers, including makers of herbicide and insecticide. This year, because of the crops-for-chemicals deal, Assmann hopes his scrambling days are over.

On a sunny day in April, Marina Fusco, an FMC analyst in Brazil, grabbed her laptop and jumped in a pickup for a four-hour drive to Assmann's farm in the big agricultural state of Mato Grosso do Sul, west of Sao Paulo. She was ushered into his office to answer a seemingly simple question: If FMC's chemicals cost $660,000, just how many bushels should he eventually hand over?

The answer isn't easy because Assmann will start planting in November and won't harvest until May next year. It's anyone's guess what the price of soybeans will be then. The soybean futures market at the Chicago Board of Trade provides one clue. But futures fluctuate every second, and those changes over tens of thousands of bushels can translate into big money.

So Fusco and Assmann haggled, stealing glances at their computers to check prices for Chicago futures due in May 2011. Fusco threw out a few numbers and fired off a half-dozen e-mails to staffers at her Brazilian office and in Philadelphia to double-check her math. After an hour, the two agreed to value the soybeans at roughly $10 a bushel regardless of what the market price is next year. Translation: Assmann would have to hand over 66,000 bushels in exchange for FMC's chemicals.

The two signed a single-page contract stipulating terms like the warehouse to which Assmann must send the soybeans when they're harvested. Now it was up to one of Fusco's colleagues in Philadelphia, Julian Treves, to prevent FMC from losing money if soybeans are worth less than $10 a bushel when the company receives Assmann's crop. Here is where derivatives come into the story.

Treves called Citigroup Inc. in Houston. Within 10 minutes, he agreed to pay Citi $3,000 to design a derivative to protect FMC. If the price of soybeans is below $10 in a year, Citi must pay the difference to FMC. If the price is above $10, FMC must give the difference to Citi.

Banks like Citi, in turn, typically transfer their risk by finding a company that regularly buys soybeans and wants to lock in prices a year ahead of time at $10. In Wall Street parlance, FMC and Citi are hedged -- protected against the hard-to-predict price fluctuations.

Even the harshest critics of derivatives are fans of such hedging. Locking in a stable price for a key raw material allows a manufacturer or a retailer to avoid raising prices on a host of products, from coffee at Starbucks Corp. to clothes at a department store.

"You shouldn't tar all derivatives with the same brush," said Frank Partnoy, a former derivatives trader who lashed out at them in his book "Infectious Greed." "It's hard to think of the world without them."

The problem is, derivatives can also be used to gamble. That's because you don't have to own the asset that a particular derivative tracks. Say that FMC just had a hunch that soybean prices would fall. It could have entered into soybean futures contracts in hopes of making a little money on the side.

American International Group Inc. nearly collapsed in 2008 thanks to such side bets. Though largely an insurer, AIG gambled hundreds of billions via derivatives that homeowners with bad credit would continue making payments on their mortgages. What's more, it didn't set aside much money in case it was wrong and had to pay parties that took the other side of the bet that these homeowners would stop paying.

When homeowners did stop paying during the housing crash, AIG suffered huge losses. Taxpayers had to fork over $182 billion to keep the company afloat.

The financial overhaul bills passed by the Senate and the House won't outlaw the kind of speculation AIG did. But they will force AIG and many other derivative users to put money aside. The goal is to prevent another financial meltdown.

The Senate version would require banks that take people's deposits or borrow from the Federal Reserve to put their derivatives-trading units into separately funded subsidiaries walled off from their other businesses. The House version would not. In addition, both bills would replace many private deals like FMC's with one-size-fits-all contracts that trade on public exchanges where everyone could see prices. The two versions would allow some companies that are hedging, not gambling, to continue with their customized deals.

If FMC were forced to use an exchange, it would be able to hedge soybeans only in standardized units of 5,000 bushels. Thus it could have hedged only 65,000 bushels, not the 66,000 it will own after Assmann's harvest. That would have left FMC exposed to losses on a 1,000 bushels if prices fell under $10 in a year. Since FMC has struck similar deals with dozens of other Brazilian farmers, the losses could add up.

Also, many standardized contracts only allow hedging on prices for certain months in the future. In the case of soybeans, FMC can enter into contracts that expire in May 2011 when Assmann harvests his crops but not in four other months of the year. Some of the farmers bartering with FMC harvest their crops later in the long Brazilian growing season during months for which standardized contracts don't exist.

Finally, the two bills would force bank middlemen, like Citi in FMC's case, to set aside money in case either party to a derivative can't pay up.

"If Citi has to hold higher reserves, Economics 101 says they'll pass those costs on to us," said FMC treasurer Tom Deas.

Despite the likely change in rules, derivatives will remain popular. The fear of something going wrong, and the desire to hedge against it, is just too powerful.

Since his barter with FMC, Assmann's fear of falling prices has started to come true. Investors on the Chicago Board of Trade now predict soybeans in May 2011 will fetch closer to $9 than $10. Says the otherwise confident farmer, "You can never be 100 percent sure."

Chrysler recalls almost 700,000 Jeeps, minivans

DETROIT (AP) -- Chrysler is recalling almost 600,000 minivans and Jeep Wranglers in the United States and another 100,000 elsewhere because of brake or wiring problems that could create safety issues, the company and federal regulators said Monday.

Chrysler said it is recalling 288,968 Jeep Wranglers from the 2006 through 2010 model years due to a potential brake fluid leak.

It also is recalling 284,831 Dodge Grand Caravan and Chrysler Town & Country minivans from the 2008 and 2009 model years because a wiring problem can cause a fire inside the sliding doors.

Another 76,430 Wranglers and 34,143 minivans are being recalled in Canada, Mexico and other international markets, Chrysler said.

Neither problem has caused any crashes or injuries, Chrysler Group LLC said.

It was the second notable recall in the past week for Chrysler. The company recalled nearly 35,000 Dodge Calibers and a limited number of Jeep Compasses last week to fix a potential problem with sticky gas pedals, the same issue that has afflicted millions of Toyotas.

In the latest recall, the front inner fender liners on the Jeeps can rub against the brake fluid tubes and cause a leak. The National Highway Traffic Safety Administration said the leak could lead to a partial brake loss.

The minivans can have improperly placed wires that can come into contact with sliding door hinges that could cut through the insulation, Chrysler and NHTSA said.

Chrysler spokesman Nick Cappa said the defect could lead to a fire inside the minivan door "in rare instances."

Chrysler will notify owners and dealers about the repairs, which will be made free of charge. The recall is expected to start later this month.

The Wranglers affected by the recall were made from May 15, 2006 through Aug. 9, 2010, according to NHTSA. The minivans were made from February 2007 through September 2007.

Associated Press Writer Ken Thomas in the Washington, D.C., bureau contributed to this report.

Ted Koppel's Son Found Dead

Ted Koppel's son Andrew has died -- reportedly after a drinking binge in NYC.

The 40-year-old was found unconscious and not breathing in an apartment in Washington Heights early Tuesday morning -- and he was pronounced dead on the scene.

According to the Post, Koppel had been drinking all day with Russell Wimberly, a 32-year old waiter he'd just met.

The two ended up at the apartment of one of Wimberly's friends, where he says he told Koppel to sleep it off.

Wimberly and friend Belinda Caban later discovered Andrew wasn't breathing and called 911.

Andrew was Ted's only son.