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May 18, 2010 Tuesday 9:18 PM EST
SECTION: NEWS & COMMENTARY; Markets
LENGTH: 435 words
HEADLINE: Senate rejects ban of naked credit default swaps
BYLINE: Ronald D. Orol, MarketWatch mailto:firstname.lastname@example.org.
Ronald D. Orol is a MarketWatch reporter, based in Washington.
WASHINGTON (MarketWatch) — Senators late Tuesday rejected an amendment to a sweeping bank reform bill that would have prohibited so-called naked credit default swaps.
Credit default swaps are a form of insurance institutions buy on bonds they purchase to protect them against the possibility that those bonds default.
However, naked credit default swaps are derivative investments set up by two investor groups that have no insurable interest but are betting on whether another bond will default or not.
The measure, which was introduced by Sen. Byron Dorgan, D-N.D., would have been attached to a bank reform bill under consideration in the Senate. A measure banning naked credit default swaps was approved by the House as part of a bank reform bill it approved in December.
“There is not one social or economic benefit to these investments,” Dorgan said.
The rejection comes after Senate Majority Leader Harry Reid, D-Nev., filed a procedural motion late Monday that requires the chamber to vote mid-day Wednesday to end debate on the bank-reform bill working its way through the Senate.
It is unclear whether Democrats had the filibuster-proof 60 votes they needed to end debate — they need the “aye” vote of at least one Republican to back the motion. But if successful on Wednesday, a vote on final passage of the underlying bill would likely take place late Thursday or Friday.
Sen. Bob Corker, R-Tenn., said earlier Tuesday that he expects four or five Republicans will vote to approve the bill.
Late Tuesday, Republicans blocked a measure that would strengthen a provision in the underlying bill based on the so-called Volcker Rule, named after former Fed Chairman Paul Volcker, who chairs President Barack Obama’s economic advisory panel.
The measure, introduced by Sen. Carl Levin, D-Mich. would seek to prohibit big banks from making speculative investments in stocks, bonds and derivatives. It would also force big banks to sell hedge funds and private equity divisions. The provision also seeks to prohibit investment banks from packaging mortgage securities, selling them, and then betting against them.
The measure would be a significant expansion upon the underlying bank reform legislation, which instructs bank regulators to study the Volcker rule and require regulators to follow the recommendations made by the report.
Levin introduced the measure after completing an 18-month investigation into conflicts of interest between investment banks and credit rating agencies.
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