Right now, the biggest battle in bank reform is over a provision introduced by Senator Blanche Lincoln of Arkansas that would force the giant Wall Street banks to give up their lucrative derivative trading businesses if they want the government (i.e. taxpayers) to continue insuring their commercial deposits.
The five biggest Wall Street banks have had the derivatives market (derivatives are bets on whether the price of certain assets will rise or fall, bets thereby "derived" from asset prices) almost entirely to themselves. Last year their revenues from derivatives trading totaled a whopping $22.6 billion. Their advantage comes from their large size, plus government insurance of their commercial deposits that allows them to raise money more cheaply than other financial institutions.
Derivatives lie at the point where the basic saving-and-lending function of commercial banking meets the private casino of Wall Street investment banking. You and I subsidize the biggest players in the casino who, precisely because we subsidize them, have grown too big to fail. The Glass-Steagall Act once prevented the casino from using commercial deposits, but since 1999, when Glass-Steagall was repealed, the game has exploded. That's part of the reason the giants on Wall Street could make wild bets that ended up threatening the entire economy, costing millions of Americans their jobs and savings, and requiring a massive taxpayer-financed bailout.
Lincoln wants to force the banks to put their derivatives into separate entities that aren't subsidized by you and me. This is just common sense. Her move would also end the big banks' monopoly over derivatives, thereby reducing their risk to the financial system. It would also cut dramatically into the big banks' profits.
Obviously, the big banks are apoplectic about Lincoln's measure and will do almost anything to strip it from the Dodd bill. The banks have 130 registered lobbyists, countless unregistered ones, 40 former banking staffers, and at least one retired senator (Trent Lott) crawling over Capitol Hill, arguing that Lincoln's provision would be the end of civilization as we know it.
They also seem to have ensnared Paul Volcker. Late last week Volcker opined that commercial shouldn't be barred from dealing in derivatives because derivatives are an important aspect of commercial banking; they hedge (that is, provide insurance against) risks associated with interest rates on loans. It's an odd argument. If derivatives were as essential to the normal practice of lending as Volcker says, you'd expect every commercial bank to be dealing in them instead of just the five giant Wall Street behemoths.
As to the risk you and I might be left holding the bag again, Volcker says not to worry: His own rule now contained in the Dodd bill, preventing bankers from making bets for their own accounts, would take care of that. But Volcker's rule would not erode the giant banks' monopoly over derivatives trading -- making them too big to fail. By contrast, Lincoln's provision, by pushing derivative trading out of commercial banking, would remove the big banks' artificial advantage, resulting in more competition and a better capitalized derivatives market.
Another argument being disingenuously used by Lincoln's opponents is her measure would push derivative trading into unregulated shadow markets. That's nonsense. Derivatives would have to be traded through a central clearinghouse or exchange, and every dealer in derivatives would still have to be registered and regulated by the Commodity Futures Trading Corporation or by the SEC.
So what are Lincoln's chances? All the big guns are aiming at her. Lobbyists are lined up against her. Republicans and many Democrats who want to do the Street's bidding are eager to get rid of Lincoln's measure. But she has two things going for her. First is the awkwardness for the White House if the President were to come out explicitly against her. For many weeks the Administration has talked about the importance of being tough on derivatives. The President has even said he'll veto any bill that doesn't go far enough regulating them. Now Lincoln is giving the White House a chance to prove its mettle or show itself to be pandering to the Street on one of the biggest reasons the Street almost melted down in the fall of 2008.
The second advantage Lincoln has is her measure passed her committee with so much momentum -- including the votes of every Democrat on the panel and one Republican -- that it's been included in Dodd's overall financial reform bill. While it's always possible for opponents of reform to hide when amendments are voted down, it's much harder to hide when trying to strip a provision from a bill. Democrats who want to do so will have to join Republican Senators Judd Gregg, Saxby Chambliss, and Bob Corker, who already have introduced an amendment to accomplish this on behalf of their Wall Street patrons. The public will be able to identify which Senate Democrats care more about Wall Street's campaign donations than the public good.
Volcker has given these Democrats, and the White House, some cover. But the public is watching closely. Some cover may not be enough.
Cross-posted from RobertReich.org
Sen. Ted Kaufman: Unusual Market Activity: the SEC and High Frequency Trading
It's too soon to know the myriad factors that played into last week's meltdown, though it appears to be quite likely that we witnessed a real-time example of high-tech trading run wild -- or, in some cases, unplugged.
I don't see one ounce of value in derivatives other than to create high paid Wall Street jobs.
And look at the intense lobbying against deleting them - prima facia evidece that someone is making big money on these. Lobbyist should be shot on sight because they only distort cajole and lie.
"vote the rascals out" if they get too out of line?
Aside: Remember the health care debacle? They watered down, and watered down, until only keeping in cost increases for the middle class and increased policies paid for, again by middle class taxpayers (the rich pay no taxes; neither do corporations), and the government is the insurer's cop, collecting the taxes and handing the payments to the insurers. Watch something similar happen to this so-called banking/finance reform bill.
If Lincoln wins the primary, she can then let Harry arrange to scuttle the whole Dodd dud, and they can do the "start over" dance, and drag that out until November. Then, if anything happens at all, it will be with the next congress in mind, or by that next congress.
Doubt this? Look at Kerry-Lieberman's so-called "energy-environment" bill. Corporate bailouts all over the map.
Time to switch channels. That game is over.
Now, there are derivatives and DERIVATIVES. What was so troubling were the synthetic derivatives that seemed on tenuously connected to any real asset. Trading in those - making bets - proved disastrous for those who bet wrong.
I wonder whether it is possible to create a sliding scale. If a deposit insured bank wants to trade in derivatives, then it should pay a higher rate of deposit insurance to FDIC or to a new, say, bank liquidation fund. Derivatives themselves are not the problem. It's the lack of transparency, the overleverage among banks and shadow banks, and the very existence of the shadow banking industry that are the problems. I'm not sure whether Lincoln's proposal captures all of these nuances, but it is certainly worthy of consideration.
hen you write, "(B)anks should make loans based on deposits rather than guesses and loaning money they don't have or own 'should' be illegal." misses the point. The banks had money. They just stretched it to incredible limits. And, saying that banks should only make loans based on deposits is to evade the issue. What are the capital requirements?
The Bank for International Settlements would have mightily contributed to the problem if the US had followed its recommendations for loosening capital requirements even further.
Worse: in its enthusiasm to dismantle Glass-Steagall, it doesn't seem as if anyone allegedly holding the reins ever wondered what would happen if the banks traded on their implicit "bailout" via FDIC if its trading in credit swaps, etc. turned negative. Either you can reimpose Glass-Steagall or some updated version, or you can compel banks who wish to trade as they have and are doing now - and those quasi-banks in the shadow system - to have to pay some sort of fee in order to engage in these activities. Dodd's bill has eliminated the most minimal of fees - the $50 billion - while the IMF recommends strongly such a fee.
This is like handing off a major slice of GDP to foreign banks, and they will suck it right off the table. Nobody has to bank in the United States.
Things such as derivatives, futures and frankly ANY kind of Wall Street participation should be a SEPARATE entity. Perhaps we need 'investment' banks and 'savings & loan' banks as separate entities.
The BEST thing any of us can do is immediately PULL all of our money out of these 'big 5' banks and use a local, smaller bank that does not place casino bets with our money.
Have an account with Chase or US Bank or BofA? Get your money out and go local!!
Some folks think that we will become the "New Greece." Hardly. The Greeks got off their rear ends and took to the streets. Americans will quietly wither away in their homes. I say this as an American citizen/taxpayer.
I GUARANTEE that the provision Senator Lincoln is trying to get passed will either die or be watered down so heavily it will be ineffective. Not only does The Street have a stake in this, but the FEDERAL RESERVE does as well, as they are PRIVATE BANKERS and NOT a federal entity in any way, shape, or form.
Parasites can make billions without ptoducing anything but taking money they do not deserve. - From any human being that is theft and fraud.
And for that they should go to jail for even SUGGESTING to use derivatives.
The state of our so called democracy can be seen very clearly when seeing how politicians will help the greates criminals the planet has ever seen and the people pick up each and every bill the parasites toss at us.
You might argue that professional managers and money market managers are parasites. However, shouldn't a CFO have the ability to take money on hand and invest in the commercial paper markets to increase its value rather than let it sit in a bank and earn meager interest amounts? Is that parasitic too? We need to paint with a narrower brush.
But, is this the same Lincoln who was so, let's call it, neocon on health care "reform"? She appears to be for reform (no parentheses modifiers) as in financial system reform while most senators seem to for financial system "reform". She is on the following list:
Cantwell (D-WA)
Coburn (R-OK)
Dorgan (D-ND)
Ensign (R-NV)
Feingold (D-WI)
Lincoln (D-AR)
Sanders (I-VT)
Shelby (R-AL)
Webb (D-VA)
Wyden (D-OR)
This is the list of 10 senators who voted for both the Brown-Kaufman amendment and the Vitter amendment. Note that Brown nor Kaufman nor Vitter is on the list. Note that Sanders did vote for the Vitter amendment.
So, she is for breaking up the megabanks, full auditing of the Fed and ensuring that the knowing when to hold them and when to fold them is taken out of real economy poisoning range. Is she also for ensuring that the CFPA is fully independent ----- NOT housed in Fed? (Of course this assumes she is for the CFPA).
This goes along with keeping after politicians with our emails or snail mails by telling those we agree with to keep up the good work and telling those we don't agree with to take a leap off a cliff because we'll do our darndest to see that they fail.
Perhaps John Brummet, columnist for the Arkansas News says it best: "What Lincoln is doing is assembling a jigsaw puzzle that, if completed, will show the map of Arkansas at the end of a stick … as a sucker."