A Runoff for Lincoln: Good News for Wall Street Reform?

| Tue May. 18, 2010 9:32 PM PDT

We don't yet know the final results of the Arkansas Senate Democratic primary, but one thing is certain: this race headed for a runoff. Neither incumbent Sen. Blanche Lincoln nor her union-backed challenger, Lt. Gov. Bill Halter, will get the 50 percent needed to avoid a rematch on June 8.

The extension of this primary contest is good news for supporters of strong financial regulatory reform. When Lincoln released her proposal to regulate financial derivatives on April 13, many observers were shocked by its toughness. Lincoln's bill would force almost all derivatives onto exchanges, where it would be more transparent for traders and regulators. It would also force big Wall Street banks to spin off their derivatives desks—separating a practice that critics deride as gambling from other banking activities.

So why would a normally conservative, red-state Democrat go so hard on the banks? One theory is that Halter's primary challenge pushed Lincoln to the left. Under this scenario, Lincoln worried that her opponent could accuse her of being too close to Wall Street, so she made her reform bill as tough as possible in order to preempt any attacks.

As primary day drew near, Lincoln hinted that she might be open to giving up her derivatives stand. But now that the contest is going into overtime, it will be very hard for her to change course without paying a price at the polls. With her left flank still vulnerable, Lincoln will feel pressure to stand tall on derivatives. Financial reform is at a crucial juncture—a key Democratic senator has expressed worries that the process "fell off a cliff" on Tuesday, as Republicans suddenly stopped cooperating. The weeks between now and Lincoln's runoff are critical. But since Lincoln still has to worry about Halter, supporters of strict derivatives regulation probably won't have to worry about her.

Also happening Tuesday night: Rand Paul wins the Republican Senate primary in Kentucky and Dems rejoice, while Republican-turned-Democrat Arlen Specter goes down to defeat in Pennsylvania.

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