Despite earlier reports of a new day for the embattled Section 716 provision of the Wall Street reform bill, which would force mega-banks to spin off their swaps trading operations, a compromise appears in the works, which would admittedly be preferable to an outright elimination.

Senator Blanche Lincoln is considering compromise language to her derivatives proposal that would phase in over two years a requirement that commercial banks push out their swaps trading desks to subsidiaries.

The changes are aimed at clarifying questions about the original language and do not pull back from the purpose of the measure, which is to separate commercial banking from derivatives trading, Courtney Rowe, Lincoln’s spokeswoman, said today in an e-mailed statement.

Let’s trust but verify that statement. Banks would get two years to continue racking up profits, set up their subsidiary operations which would take over the desks, and produce a study (there’s that word again) which would “determine the impact of the measure on mortgage lending, small business lending, jobs and capital formation.” The banks get to create this, and it says nothing about input from federal regulators or independent analysts. If they are not involved, expect a scare paper predicting massive stock market crashes and 95% unemployment if the proposal moves forward. Delay is always designed to eventually deny, in these cases.

In addition, the revised language would “clarify that banks with access to Federal Deposit Insurance Corp. deposit guarantees and the Federal Reserve’s discount lending window would be allowed to hold a separately capitalized swap dealer in an affiliate of the bank holding company.” This was always the case from the very beginning of the legislation. The important element to this is the separate capitalization, which would change how the swap markets connect with the rest of the economy. It would also likely reduce the overall size of the market, unless enough capital can be raised to cover it.

Bloomberg reports that the derivatives title will be among the final pieces determined by the conference committee. The article adds that the banking industry continues to fight strongly on this issue almost to the exclusion of everything else in the bill. JPMorgan Chase CEO Jamie Dimon is apparently personally lobbying conferees.

This runs the risk of turning Section 716 into a huge bargaining chip which can get traded away at the last minute, after it outlives its usefulness of drawing the finance lobby away from other parts of the package. But spinning off the trading desks is a consequential policy on its own, and should not be conceded or weakened by a two-year study. Blanche Lincoln has a lot to think about here. She supposedly won her Democratic primary on the strength of committing to “tough” new rules on Wall Street. A compromise like this would damage that argument significantly. It’s her move.

UPDATE: HuffPo’s Shahein Nasiripour and Ryan Grim report that Treasury, led by Michael Barr (a potential pick to replace John Dugan at the Office of the Comptroller of the Currency), is still standing with the banksters on this one. Could they have brokered this compromise for Lincoln? Senate aides say more support from regional Fed Presidents, which along with Paul Volcker’s softened opposition undermine the united front from the establishment, will be coming soon.

…Here’s Lincoln’s clarification language:

SEC. 716 TERM SHEET

CLARIFICATIONS

New FED Section 13 (3) Broad Based Federal Assistance to Swap Entities would be ok

Swap Dealer can be a BHC Affiliate
• Separately capitalized
• Subject to 23A and 23B restrictions

Bank MSPs not subject to FDIC Insurance and Fed Discount window restrictions.

FDIC bridge banks, conservatorships and receiverships exempted

2 Year Transition Period to “Push Out”

FBA gets to determine time frame for push out

FBA consults with SEC/CFTC

FBA required to consider impact on:
-Mortgage lending
-Small business Lending
-Jobs
-Capital Formation

Need to get my Congress-to-English dictionary out to fully deal with this.