WASHINGTON — U.S. Rep. Jim Himes is not at the center of the delicate negotiations over a sweeping financial reform bill. But the 4th District Democrat is getting heat over the measure nonetheless, from consumer advocates in Washington and Connecticut who say that Himes and other centrist Democrats are pushing from the sidelines to weaken a key provision regulating derivatives.

Himes adamantly rejects that charge and says his background as a former investment banker gives him a unique understanding of this complex issue.

“The discussion of derivatives in the political world has become a zero sum game,” Himes said. “But there’s a lot more common ground here than the people who are yelling about this would have you believe.”

The battle over derivatives, a $600 trillion market that helped fuel the financial meltdown, is one of the most politically explosive elements of the Wall Street reform bill.

Derivatives are bets placed on what will happen to the price of a product in the future, such as airline fuel or farm commodities. Right now, they are almost completely unregulated. Billionaire investor Warren Buffet has called them “financial weapons of mass destruction.”

The House-Senate committee working to reconcile differing versions of the financial overhaul could strike an agreement on this dicey subject as early as today. Both the House and Senate bills seek to bring more transparency and oversight to this market, but the Senate bill goes farther.

The Senate derivatives provision would require almost all derivatives to be traded on a regulated exchange and to go through a clearinghouse, a step would give regulators the tools needed to spot fraud or other abuse. It also would help ensure that companies making these bets have the capital to back them up. The Senate measure would also force banks to move their derivatives operations into separately-capitalized subsidiaries.

The House version would subject many derivative transactions to the same transparency and oversight requirements, but some of those bets would only have to be reported to regulators, not traded on an exchange or go through a clearinghouse. Critics say those are loopholes that would allow many companies to escape the tough regulations and that could lead to the same kind of abuses that exacerbated the economic crisis. The House version also does not require banks to separate out their derivatives businesses.

Himes helped craft the derivatives portion of the House bill, and he weighed in strongly against the Senate version as the negotiations to reconcile the competing measures got underway.

Himes joined with other centrist Democrats in sending a letter urging the House and Senate’s lead negotiators to nix the Senate derivatives provision in favor of the House version. Critics say that puts him on the side of Wall Street interests, who have lined up in fierce opposition to the Senate proposal.

“In the Senate version, there’s a much higher standard for transparency and for ensuring that capital requirements are behind the bets,” said Heather Booth, executive director of Americans for Financial Reform, a coalition of consumer, labor, and other groups pushing for a strong overhaul. Himes and others want “the weaker language that gives more room for the risky and reckless behavior from Wall Street.”

Tom Swan, executive director of Connecticut Citizen Action Group, said when he heard about Himes’ position, he called his office to ask, “What are you thinking?”

“I love Jim Himes, but I think that is bad policy and bad politics for Jim Himes,” Swan said. On the politics in particular, he said: “Nobody should want to go into an election year being viewed as being on the side of Wall Street.”

Himes, a former investment banker at Goldman Sachs, said that’s an overly simplistic view of the debate. For one thing, he fully supported the House bill, which takes significant steps toward cracking down on Wall Street. That vote has sparked calls to his office from constituents who work on Wall Street and are furious with his position, he said.

Moreover, Himes said, there are really two kinds of derivatives, one good and one bad.

The good ones include those in which a farmer wants to lock in a price on his wheat at the beginning of the year so he can plan properly, or IBM tries to protect itself from fluctuations in the yen when selling billions of dollars worth of goods to Japan.

“Other derivatives, of the variety written by AIG, are simply very big bets on, in that case, subprime mortgages,” Himes said.

“The derivatives that the farmer or IBM use are to Abacus what a sunfish is to a shark,” Himes said, referring to Goldman Sachs’ Abacus dealings that are now at the center of a federal probe. “Yeah, they are both fish, but you’re going to treat them much differently.”

The financial overhaul, he said, needs to make sure it creates “hard and aggressive oversight of the kinds of derivatives that proved so dangerous to the system and to the people who wrote those derivatives, without hurting the farmer and IBM.”

The House bill achieves that, he argued, striking a balance between cracking down on bad actors while maintaining derivatives as an option for legitimate business interests that want to protect the long-term value of their products. The Senate bill would make it much more “difficult and expensive” for legitimate derivatives users to hedge their risk. He said it could even force those activities offshore. “If you are a swaps dealer in New York City now, you may go to Dubai or Singapore, and we are going to have less regulatory reach” over those transactions.

Consumer advocates say the idea that the measure would force legitimate businesses to go offshore is a red herring, although they concede that some companies will have to put more capital in upfront and that could be more expensive. But that is needed insurance in the market, they say.

“AIG made all these bets and there was no money in the system, so when it came time to make good on those bets, it couldn’t and it had to go to the taxpayers,” said Heather Slavkin, a senior policy advisory for the AFL-CIO.

As for the politics of this issue, Himes, whose Fairfield County district includes affluent employees of financial service firms as well as those who have been hurt by the economic meltdown’s ripple effects, said he was not too focused on the political fallout.

On almost any issue, “given the nature of my district, whatever decision I make will almost certainly irritate somewhere between  40 and 50 percent of my constituents. So all I can do is work hard, think hard, and do what I think is right,” he said. “Unfortunately, derivatives have become a political football. There are thousands of people out there with strong feelings about derivatives, but only dozens who understand derivatives.”

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