On small states and big stakes

Big investment bankers on Wall Street squirmed last week over the prospect of making less money. It was because of a guy holding an inconsequential office in the normally inconsequential little state where I live.

In Arkansas, we have this centrist Democratic senator, Blanche Lincoln, who is opposed from the left in her own party primary in May. Her opponent was coaxed into the race by unions and liberal "netroots" groups like MoveOn.org.

His name is Bill Halter and he holds the office of lieutenant governor, which means he has no real responsibility.

He is a Rhodes scholar who worked in the Clinton administration, which he ended as the acting director of the Social Security Administration because everyone else had moved out to the private sector.

Now he's the guy making a leftward-lurching consumer champion out of a previously unreconstructed corporatist Democrat who just so happens to be hot-seated chairwoman of the Senate Agriculture Committee.

Lincoln, that is.

By chairing the committee overseeing federal agencies that regulate agricultural futures markets, Lincoln occupies a key role in the proposed new regulation of exotic financial instruments called derivatives. This is part of the next big Barack Obama initiative, which is reforming the financial industry.

Lincoln made a fine mess of that last big Obama initiative, health care reform. She insisted on excising a public option, angering the left. Then she gave the remaining bill its vital and 60th vote, angering the right.

So business interests became concerned that the financial reform bill would be entirely too much a product of liberal anti-business thinking. So they pleaded to Lincoln, who, as was her custom until just the other day, replied that she would work with her ranking Republican member, Saxby Chambliss of Georgia, on a bipartisan and "surgical" solution.

It looked as if she intended to straddle the middle on another big issue.

But, back home, Halter was using national liberal money to blast her daily on television as a chum of Wall Street.

So you'll never guess what happened. Or maybe you will, if you harbor a little perceptiveness and well-placed cynicism about modern politics.

She dumped Chambliss last weekend and put out a tough, unilateral bill that gets to the left of the Obama administration on all points except one. That's a rational one by which non-financial companies could still work out private two-party derivatives with investment banks to stabilize their costs without having to go into proposed new public derivative exchanges.

Otherwise, her bill is uncommonly tough, most notably in this regard: The bill adopts language of others that defines banks that are "too big to fail" and thus would be eligible for government bailouts if we should ever again venture as close to financial Armageddon as we did near the end of 2008.

But then Lincoln adds that any bank so defined that wants to remain eligible for bailouts would be required to move its "swap shop," meaning its derivative dealing division, out of the bank into a wholly separate entity.

We'll not be using taxpayer dollars to bail out any of these wild risks and fancy hedges, Lincoln says.

That scares banks that make a lot of money from derivatives. It unnerves the Obama administration, which had not intended to be quite so punitive on banks. It had figured that standards, regulated public exchanges and disclosures would be a good enough start.

Lincoln's provision probably will die. Her bill will be weakened.

But that would still leave this: Wall Street was counting on Lincoln to move financial reform to the right. But instead she went all rogue and the entire debate is now set to take place left of center.

Halter could never accomplish so much if he actually got elected, which is a remote prospect anyway.

John Brummett is an award-winning columnist for the Arkansas News Bureau in Little Rock and author of "High Wire," a book about Bill Clinton's first year as president. His e-mail address is jbrummett@ arkansasnews.com.