The Dodd-Obama Permanent TARP

Senate Democrats secretly agree that Sen. Blanche Lincoln’s (D-AR) proposal to attempt to impose a complete separating on credit default swaps and credit providers (i.e. banks) makes no sense. But they’re too embarrassed to say so while Lincoln uses the proposal to wage a populist campaign for re-nomination against liberal Arkansas Lt. Governor Bill Halter.

Now that Lincoln has been forced into a June 8 run-off against Halter, Lincoln’s Senate colleagues are looking for a quiet way to kill her swaps proposal. Banking Committee Chair Chris Dodd (D-CT) first proposed, and then backed off, a two-year delay in the effective date of the Lincoln proposal, suggesting that regulators, who uniformly oppose the idea, will kill it before then.

Based on Sen. Judd Gregg’s (R-NH) comments, Dodd may have dropped his amendment because sensibly-thinking Senators didn’t buy the delay scheme. And it is a good thing they didn’t.

All Dodd’s delaying amendment would do is cover the swaps market in uncertainty.

Pretend you are the managing director of a trading firm about to make a decision concerning the investment of a couple of hundred million in new technology (one of those fancy data centers), the location of a few score employees, and how to manage one of your major business lines (a swaps trading desk).  Right now you have the choice of New Jersey or the London suburbs.  Your government relations wizards tell you that though the current American law will require you to spin off the operation in two years, they’re “sure” Treasury Secretary Timothy Geithner is going to take care of it.

Now, your bonus and your prospects with the company are on the line.

Do you really trust Geithner that much?  Do you want to explain to the CEO that you have to move the operation you just built because you were really sure the government didn’t mean what it said?  What if Gary Gensler (who really wants the Treasury job and supports the Lincoln amendment) has replaced Geithner as Treasury Secretary?

You’re going with London.

Attempting to re-engineer the financial markets in Congress was a bad idea from the beginning. The predictable result will be to make markets more like Congress: irrational, unpredictable, and dysfunctional.