Wall Street Deregulation Garners Bipartisan Support Despite Devastating JPMorgan Report

03/19/2013 07:38 pm ET | Updated May 08, 2013

WASHINGTON -- A bipartisan cadre of House lawmakers will move on legislation to deregulate Wall Street derivatives Wednesday, less than a week after Sen. Carl Levin (D-Mich.) released a devastating report on the multibillion-dollar derivatives debacle at JPMorgan Chase.

"The road to hell is paved with these bills," said Rep. Alan Grayson (D-Fla.), an advocate of financial reform.

The House Agriculture Committee will mark up several derivatives bills on Wednesday despite opposition from a coalition of public interest and consumer advocacy groups known as Americans for Financial Reform. The effort to weaken regulation of these sophisticated financial instruments follows multiple in-depth autopsies of the London Whale debacle at JPMorgan, which has already cost the company $6.2 billion and tarnished its reputation as a prudent risk manager. It also comes less than three years after the Dodd-Frank Wall Street reform legislation, signed into law by President Barack Obama in 2010, set a host of new standards for the derivatives business, including heightened transparency and reduced taxpayer support.

In a statement provided to The Huffington Post, Levin expressed exasperation at the House efforts.

"Last year, some members of Congress supported watering down Dodd-Frank derivative safeguards, but abandoned those efforts after the world learned that JPMorgan Chase had lost billions of dollars on derivative trades made out of its London office," Levin said. "It is incredible that less than a week after new JPMorgan Whale hearings detailed how the bank's London office piled up risk, hid losses, and dodged regulatory oversight, that some House members are again supporting the weakening of derivative safeguards."

Derivatives were at the heart of the 2008 financial collapse. The preferred financial vehicle for a host of risky bets on the U.S. mortgage market, they created artificial demand for subprime mortgages, encouraging banks and mortgage brokers to extend loans to doomed borrowers. Derivatives pushed insurance giant AIG to the brink of bankruptcy and proved a hotbed for abuse on Wall Street. Goldman Sachs famously settled with the Securities and Exchange Commission for betting against the very derivatives it created and sold to its clients.

Yet in an era of partisan gridlock in the nation's capital, Democrats and Republicans have come together to repeal or weaken those rules. Although Obama may not want to sign a standalone package of Wall Street deregulation into law, bipartisan legislation could be inserted into a broader bill that the president might find difficult to reject.

Many of the supporters of the latest derivatives bills are longtime anti-regulation Republicans, including Reps. Patrick McHenry (R-N.C.) and Scott Garrett (R-N.J.). But some Democratic supporters point to constituents off Wall Street when asked about the legislation by HuffPost.

A staffer for Rep. Gwen Moore (D-Wis.) said that her bill was designed not to pad banking profits, but to relieve regulatory burdens on other companies that do business with banks. "You have these huge corporations -- I'm just gonna use Caterpillar because I guess you know they're in our district. They do business in Russia and Canada. They do mining and sell huge pieces of equipment that take years to construct ... and they need to hedge those risks," said the staffer.

Moore's bill would allow a company like Caterpillar to trade derivatives with its offshore affiliates -- firms that it owns in other countries -- without posting money to a third party guaranteeing that it can make the trade.

Exempting such trades from oversight could also help foster tax avoidance, however, since companies have used sham derivatives transactions to dodge the Internal Revenue Service. Such activity is usually illegal, but the IRS has been short on resources to investigate and combat it. Requiring companies to post monetary guarantees creates an upfront cost to sham transactions that may serve as a deterrent.

"We have not taken a position on, nor advocated for this bill," Caterpillar spokesman Jim Dugan told HuffPost.

According to a 2008 report by the Government Accountability Office, Caterpillar operates 49 subsidiaries in countries classified as tax havens, including 13 in Bermuda alone.

Rep. John Garamendi (D-Calif.) is sponsoring a bill to help exempt companies that trade derivatives with public utilities from Dodd-Frank's business conduct standards. He said this would save money for the utilities and argued that his bill should not be considered as part and parcel with other derivatives legislation.

"I don't have an opinion about the other bills," Garamendi told HuffPost. "I'm considering them."

At a congressional hearing last week, Wallace Turbeville, a former Goldman Sachs banker and current senior fellow at the public policy group Demos, testified on behalf of Americans for Financial Reform that exempting utilities from the rules would ultimately help unscrupulous firms that sell derivatives to the utilities.

"I had the uncomfortable opportunity to witness sales calls by derivatives specialists on governmental utilities," Turbeville said. "I have seen the technique of fostering a sense of trust, encouraging an advisory relationship that can be exploited to sell an immensely profitable derivative when other alternatives could be better."

Garamendi dismissed Turbeville's concerns.

"The question is, 'Will the sharks on Wall Street take advantage of the power companies?'" Garamendi said. "Wall Street certainly tries to take advantage everywhere it can. But there are always risks to running a business … The way that this sector has been abused before, the Enron situation, that isn't applicable here."

The bills to be considered Wednesday also include legislation from Rep. Jim Himes (D-Conn.) -- another Goldman alum -- that would roll back Dodd-Frank's ban on taxpayer support for some kinds of derivatives trades. Himes has defended his bill as a way to ensure that more regulators oversee derivatives, though the measure is opposed by the Americans for Financial Reform.

Another bill would force the Commodity Futures Trading Commission, a regulator with derivatives responsibility, to conduct economic cost-benefit analyses for new agency rules using guidelines that would be more favorable to Wall Street banks. If the proposed rules failed the test, they could not be imposed.

CLARIFICATION: An earlier version of this article suggested that public utilities only engage in derivatives transactions with Wall Street banks. They also contract with other power companies and energy firms.

CORRECTION: A previous version of this story misidentified Rep. Gwen Moore as representing a district in Illinois. She represents a district in Wisconsin.

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