WASHINGTON (CN) – The Senate Agricultural Committee passed a bill Wednesday that would toughen legislation on derivatives, the financial tools that contributed heavily to the economic collapse. It’s the last stop before the proposed financial reform legislation hits the Senate floor on Monday.
The bill, introduced by committee chair Sen. Blanche Lincoln, D-Ark., passed by a 13-8 vote.
The bill won the support of 12 Democrats and a lone Republican, Sen. Charles Grassley of Iowa.
During his address in New York City on Thursday, President Obama said he was “encouraged” by Grassley’s vote. “That’s a good sign,” he said.
Grassley’s support has given Democrats confidence that the larger financial reform bill to be debated in the Senate this week has a shot at quick passage.
The derivatives bill forces big financial institutions to reveal more about their dealings in derivatives.
Derivatives are financial tools, such as stock options or commodity futures, whose valued is tied to the value of underlying investments. Derivatives tied to the subprime mortgage market contributed heavily to the financial meltdown in 2008.
Billionaire investor Warren Buffett has called derivatives “financial weapons of mass destruction,” a phrase that has been widely quoted by Democrats pushing for the financial reform bill.
Earlier this week, Treasury Secretary Timothy Geithner said derivatives were part of the “shadow banking system” that was “almost as big as the classic banking system” during the leadup to the financial crisis. Geithner compared the traditional financial market and the shadow market to the United States having two parallel highway systems, one with speed limits and safety regulations, and another with zero rules or controls. “A system like that makes no sense,” Geithner said.
Banks have been criticized for keeping communication about derivatives secret. The bill would turn up the regulation on banks, conforming with the Obama administration’s call for greater transparency on Wall Street.
Obama, Geithner and others have repeatedly called for bringing derivatives “out of the dark.”
In his remarks Thursday, Obama acknowledged the role of derivatives in the financial system, allowing firms to hedge against rising oil prices and other fluctuations, but asked that they be traded “out in the open.”
Under the bill, derivatives would be traded over open markets, either via a referee or publicly on an exchange. The requirements would give both regulators and consumers more information about the trades.