The House Financial Services Committee today, over the unanimous objection of committee Democrats, passed legislation to prohibit -- for more than two years after the enactment of the Wall Street Reform and Consumer Protection Act -- the implementation of provisions in the law having to do with the regulation of derivatives. The reckless use of derivatives contributed to the downfall of AIG and fueled the liquidity crisis which imperiled many of the nation’s largest financial institutions.  Today’s action represents a third wave of attack on the financial reform law by House Republicans.

The Wall Street Reform and Consumer Protection Act gives the SEC and CFTC authority to regulate the use of derivatives. It also creates transparency in markets for derivatives by requiring that most are traded on exchanges, and that details of these transactions, including price, are reported.  In addition, the law is designed to minimize the risk of financial contagion of the sort caused by AIG, by requiring that participants in derivatives markets have sufficient capital to support their trades.

The Republican bill, H.R. 1573, was originally written to prohibit implementation of the derivatives rules until December 31, 2012 – after the 2012 elections.  After coming under criticism from committee Democrats, Republicans offered and passed an amendment which would push the date up until September 30, 2012, only thirty-seven days before the November election.

The markup process revealed a rift in the Republican caucus when Committee Chairman Spencer Bachus supported an amendment by Massachusetts Congressman Stephen Lynch; the amendment was opposed by other Republican committee Members.  The Lynch amendment would restore the ability of the SEC and the CFTC to address issues related to speculative trading, including the establishment of position limits on swaps for commodities like crude oil.  Speculation in crude oil markets is thought by many to be responsible for up to 20% of the recent increase in the cost of gasoline.  The Lynch amendment passed on a voice vote.

The vote on final passage of the bill fell completely along party lines.

The passage of the Republican bill to prohibit implementation of derivatives provisions until late 2012 is a third wave of attack on the Wall Street Reform and Consumer Protection Act, which Congress passed into law in July 2010 over the almost unanimous opposition of House and Senate Republicans.  Earlier this year, House Republicans passed a budget for FY 2012 which includes large cuts in the budgets of the Securities and Exchange Commission and the Commodity Futures Trading Commission, agencies charged with overseeing key aspects of the financial reform law.  If the House budget becomes law, it is likely that both agencies will have difficulty carrying out the increased oversight of the financial services industry mandated by the law.  Earlier this month, Republican Members of the House Financial Services Committee also mounted an attack on the Consumer Financial Protection Bureau, passing legislation which would create a five-person committee to oversee the Bureau instead of the single Director as designated in the financial reform law.  During the same week, Senate Republicans announced that they would not vote to confirm anyone to head the CFPB unless the plans for the Bureau were completely overhauled.