Lincoln loses leverage on US financial reform bill

WASHINGTON May 19 (Reuters) - Senator Blanche Lincoln, a key voice for financial reform, was forced on Tuesday into a Democratic runoff election in Arkansas and lost leverage for her plan to force big banks to spin off swaps desks.

She was expected to be the vote-leader in the primary and possibly win the nomination outright. Instead, Lieutenant Governor Bill Halter ran neck-and-neck with her in a race colored by anti-Washington sentiment.

Her swap reform proposal would cost a handful of big U.S. banks billions of dollars in revenue. It is one of the final issues in a mammoth Wall Street reform bill pending in the Senate.

The swaps-desk language was a hallmark of Lincoln-authored legislation to bring the $615 trillion market in over-the-counter derivatives under federal regulation.

While Lincoln said her proposal would "ensure that banks get back to the business of banking," there was broad opposition to the idea within the financial industry and among some Obama administration officials.

Analysts said she probably would not prevail on the issue, even if she won the three-way Democratic primary. They expected efforts to strip the language would begin immediately after the primary. One alternative would be the so-called Volcker language to restrict derivatives trading by banks.

Banking Committee chairman Senator Chris Dodd proposed one resolution on Tuesday: send the swaps-desk proposal to a two-year review before a council filled with critics, effectively killing it.

Lincoln refused to soften her proposal. In an election night speech, she said, "Big Wall Street banks are unhappy with me because I am fighting to make them stop making those risky trades that have happened in the dark of the night."

Arkansas political analyst Blake Rutherford said Lincoln probably will have less political capital as an endangered incumbent.

Senate Majority Leader Harry Reid aims for a final vote on the financial reform bill in the next few days, with enough Republican support to assure passage.

At the same time the Senate will focus on the financial reform bill, Lincoln must prepare for a run-off election on June 8 with Halter. (Editing by Philip Barbara)