Wall Street Has a Gambling Problem

Taxpayers have put more than $24 trillion on the line to resuscitate Wall Street after the economic meltdown of last year. With the help of this massive taxpayer support, the nation's largest banks are posting record profits. That, by itself, is not bad. After all, our economy runs on profit, and the whole point of the government aid was to get the banks out of intensive care. The problem is that many of these banks have resumed their old habit of using other people's money to gamble with the same risky unregulated derivatives that led us into this crisis.

In the midst of the worst economic crisis since the Great Depression and with job losses and home foreclosures mounting, it's no wonder the rest of us are asking how this can be allowed to continue.

Look no further than the powerful lobbying arm of the financial services sector, which has spent at least $220 million this year lobbying Congress to stave off new rules to prevent another collapse. That is over $500,000 in lobbying for every member of Congress, which might help explain why, to date, nothing has been fixed in our porous financial regulatory system. Americans want to know when Congress will put an end to the Wall Street's secret off-book gambling schemes and restore our capitalist system by requiring real transparency and true competition.

It appears that Wall Street is not acting as a force for economic expansion, providing access to capital for companies that make things. Rather, it seems, Wall Street is using government bailouts to lever up.

Wall Street uses exotic financial tools to fund what amounts to unregulated gambling. Wall Street wants to keep its schemes too complicated to understand so that the roulette wheel can keep turning. While derivatives trading can be complex, the underlying concept is simple enough: keep trading secret and off-book and pocket profits from both sides of a trade.

Unregulated derivatives are a cash cow hidden from public view and run with less oversight even than actual casinos. The five largest U.S. commercial banks are on track to earn more than $35 billion this year trading unregulated derivatives. According to the Office of the Comptroller of the Currency, the nation's five largest commercial banks held 95 percent of the $291 trillion derivatives portfolio of the country's 25 largest bank holding companies at the end of the first quarter. More than 90 percent of those derivatives were in unregulated trading.

Prior to 2000, as a matter of federal law, all derivatives were required to be traded on regulated central exchanges overseen by the Commodity Futures Trading Commission, unless specifically exempted by the Commission. The oversight protected the public from the inherent risk posed by derivatives and from the chaos that could result from unscrupulous or reckless trading.

After 2000, the field was cleared of referees and market players were left to run wild with unregulated derivatives.

The change occurred when Wall Street asked for -- and received from Congress -- an exemption from all regulation of a massive class of derivatives, including a preemption of state gambling laws. Literally, gambling laws had to be overridden. Derivatives dealers acknowledged the gambling inherent in derivatives trading and the business they stood to gain from this exemption.

Deal-making became so opaque that it was impossible to follow. The true values of exotic instruments were impossible to determine.

Imposing full transparency and true competition will require moving derivative trades onto regulated exchanges. That would mean full transparency of trading prices and volumes, reporting requirements for large trader positions, and adequate capital reserves to protect against a default. The government needs full anti-fraud and anti-manipulation authority. Giving regulators this power will ensure a transparent and competitive marketplace and will ensure that violators will go to jail.

Wall Street has a lot of reasons for wanting to keep the unregulated derivatives casino open for business. Specifically, Sanford C. Bernstein & Co. analyst Brad Hintz recently estimated that Wall Street revenue from trading unregulated derivatives might decline by 15 percent just by moving trades to clearinghouses. That is because the current system enables banks to profit from secret pricing - pocketing the gap between what they charge customers and what they pay to hedge their trades. With transparent pricing and true competition on an exchange, higher gambling returns are much more difficult to achieve. Public disclosure of price data would also mean that dealers no longer had better price data than clients.

Let's embrace productive capitalism, not casino capitalism, by restoring transparency and true competition in the commodities markets. Our nation's financial sector can act as a great force for job creation and production. We should not stand by and let their dimly lit casino bring us all down once again.

Maria Cantwell is a U.S. Senator from Washington State.

 

Comments

[iridium53]

Senator,

You're one of 100 people who can do something about it.

What have you done?

Citizens

[userw014]

I think her closing paragraph provides a clue:

"Our nation's financial sector can act as a great force for job creation and production."

If she isn't still drinking the Wall Street kool-aide, she's at least giving it lip service.

[My-Two-Cents]

There’s about $600Trillion outstanding in the Derivatives market; that’s about ten times the GWP (if my arithmetic is correct). I don’t know very much about economics but this seems like it’s the sort of risk that there’s no recovering from should the ball stop on 00.

Again, I don’t really know very much about this so hopefully I just don’t fully appreciate the implications of what can go wrong with investing ten times the GDP of the entire world in an opaque unregulated market.

[sonofsamphm1c]

The 600 trillion is a notional number. It's not meaningless. It's also not the least bit scary.

[jeanrenoir]

Thanks for this great statement. You'd think that the past year would have awakened a very solid majority of Americans to the realization that Wall St. MUST be regulated rigorously enough to put the complete burden of failure on THEIR shoulders, not ours. Let them gamble all they want, but in a context in which they will destroy THEMSELVES and not their nation, if they get too reckless. I hope somehow that people of good will in the Congress, like you, will prevail against all the avalanche of lobbying money being hurled at you by Wall St., and finally protect We, the People, the way FDR did during the last truly ruinous fiasco created by Wall St. greed.

[edva]

Thank you Senator. Great article.

[gas123]

Sen. I just read your article, but substituted Government in place of Wall Street. It is uncanny how similar the two are.

[ThePeacemakers]

Wall St and the govt. will seem uncannily similiar because you can't at the moment substitute one for the other.

Govt has a problem because of wall st influence. This govt is bought and paid for (supposed to be of the people, by the people and for the people). And as long as the govt serves the interest of a few that would like to have you and everyone else here slaves or close to it while they rob the US treasury for tax dollars and govt contracts (all the while screaming the people should support "free market" - which NEVER existed) you'll never be able to tell the two apart.

Take away tax dollars from private industry and they would be homeless too...It's been that way since forever. They want YOU to believe in the "free market" so they can "profit" from tax dollars.

[shelchak]

YAY Maria -- you go girl!!! Now tell us what to DO ABOUT IT -- give us something to DO to help!!

[mikekc]

Sen. Cantwell I hope that as your tenure increases we see you take more leadership positions in the Senate and you stay true to the vision expressed in this brilliant article.

[mattrudy]

Ban short selling, especially naked short selling for ever. That's what brought down Bear and Lehman.

[empyrius]

We keep hearing the politicians proclaim how Wall Street is getting even richer off our money, for instance here is the latest about Goldman Sachs, http://www.spokesman.com/stories/2009/nov/01/goldman-bet-on-housing-collapse/, and yet nothing changes . . .

Yea

[Scarlet]

Brilliant.

[aofh]

"It appears that Wall Street is not acting as a force for economic expansion, providing access to capital for companies that make things."

Derivatives are not the only "instrument" the financial sector has used to the detriment of the U.S. economy. Congress needs to take a serious look at the culture of mergers and acquisitions and its effect on the economy. Given the rate of such transactions (there were nearly 500 recorded between Jan.1 and May 1 of this year), one needs to ask who benefits. Ostensibly they expand the bottom line of the acquirer,but do they really contribute to the expansion of the economy or are they shrinking the economic base? Also, are these faux investments whereby the acquiring milk the best parts of the acquired while leaving the latter to service the debt of purchase? What is the role of the financial sector in this culture?

[therealredstateblues]

And ialong the lines of M&A, we need to look closer at these private equity takeovers of solid companies and then proceed to strip them of their valuable assets and flip off the hollowed out shells

[mpt1964]

You're right Ms. Cantwell! And the Senate has a Leadership problem.

[shaitan]

Robert Rubin, Larry Summers, Tim Geitner, Alan Greenspan, Bill Clinton, Phil Graham--there are the prime culprits for what has happened--they abolished the Glass-Steagal regulation preventing Banks from trading stocks on Wall Street.

[madchen]

Get the banks out of the investment business. It's very clear what went wrong and when, If Obama and company don't see this, we have elected the wrong bunch.

[unfoxworthy]

Isn't there a consensus [already,
after examining the logistics and underlying strategy of this bailout...and the TARP]
that we HAVE elected the wrong bunch?
"Too Big to Fail" has been the mantra.
Way Bigger than Too Big to Fail" has been the remedy!
Does the middle class just love being the patsy to Wall Street?
What are we thinking? WHAT ARE WE DOING?

[rosiebond007]

Yes, too right. Wall Street is gambling daily WITH OUR MONEY & INVESTMENTS.

Needs to be regulated big time.