CLE Materials for Panel #1 - George Washington University Law ...

WILMARTH
4/1/2011 1:11 PM
2011] The Dodd-Frank Act 1033
compromise that significantly weakened the Lincoln Amendment. 355
As enacted, the Lincoln Amendment allows an FDIC-insured bank to
act as a swaps dealer with regard to (1) “[h]edging and other similar
risk mitigating activities directly related to the [bank’s] activities”; (2)
swaps involving interest rates, currency rates, and other “reference
assets that are permissible for investment by a national bank,”
including gold and silver but not other types of metals, energy, or
agricultural commodities; and (3) credit default swaps that are cleared
pursuant to Dodd-Frank and carry investment-grade ratings. 356 In
addition, the Lincoln Amendment allows banks up to five years to
divest or spin off nonconforming derivatives operations into separate
affiliates. 357
Analysts estimate that the compromised Lincoln Amendment will
require major banks to spin off only 10-20% of their existing
derivatives activities into separate affiliates. 358 In addition, banks
will able to argue for retention of derivatives that are used for
“hedging” purposes, an open-ended standard that will require
elaboration by regulators. 359 As in the case of the Volcker Rule,
commentators concluded that the Lincoln Amendment was “greatly
diluted,” 360 “significantly weakened,” 361 and “watered down,” 362
355 See Barrett & Paletta, supra note 354; David Cho et al., Lawmakers Guide Wall
Street Reform into Homestretch: Industry Left Largely Intact, WASH.POST, June 26, 2010,
at A1; see also supra notes 329–31 and accompanying text (discussing the last-minute
compromise that weakened the Volcker Rule).
356 Dodd-Frank Act § 716(d); see also Hill, supra note 342; Heather Landy, Derivatives
Compromise Is All About Enforcement, AM. BANKER, June 30, 2010, at 1; Wyatt &
Herszenhorn, supra note 354. It is highly ironic that Congress chose to rely on credit
ratings as a reliable basis for exempting CDS from the Lincoln Amendment. Congress
declared in section 931(5) of Dodd-Frank that inaccurate credit ratings on structured
financial products “contributed significantly to the mismanagement of risks by financial
institutions and investors, which in turn adversely impacted the health of the economy in
the United States and around the world.” Dodd-Frank Act § 931(5); see also supra Part
III.B. (describing conflicts of interest that encouraged CRAs to assign inaccurate and
misleading credit ratings to structured financial products).
357 See Dodd-Frank Act § 716(h) (providing that the Lincoln Amendment will take
effect two years after Dodd-Frank’s effective date); id. § 716(f) (permitting up to three
additional years for banks to divest or cease nonconforming derivatives operations).
358 Harper & Keoun, supra note 330; Smith & Lucchetti, supra note 260.
359 Wyatt & Herszenhorn, supra note 354.
360 Johnson, supra note 309.
361 Hill, supra note 342 (quoting the Consumer Federation of America).
362 Smith & Lucchetti, supra note 260.