POLITICS
01/06/2015 07:28 pm ET Updated Jan 06, 2015

Rep. Kevin Yoder Claims Spurring More Risky Bets Will Make Banking Safer

WASHINGTON -- Rep. Kevin Yoder (R-Kan.) has finally chosen to defend his role in passing a bill to subsidize Wall Street derivatives trades after going politically MIA when the issue exploded in mid-December.

The controversial measure eliminated a key rule from the 2010 Dodd-Frank financial reform law that prohibited banks from trading risky derivatives through subsidiaries insured by taxpayers. It was Yoder who first slipped this Wall Street perk into a $1.1 trillion must-pass spending bill, which indeed passed last month.

Big banks aggressively supported the measure because such taxpayer-backed trades are more profitable for them. Its language was drafted by Citigroup lobbyists, and JPMorgan Chase CEO Jamie Dimon personally lobbied members of Congress to approve it. Ultimately, the congressional leadership of both parties signed off on its inclusion in the spending legislation.

But some Democrats and Republicans, led by Sen. Elizabeth Warren (D-Mass.), objected strongly, saying it would encourage reckless trades and put taxpayers on the hook for potentially huge losses.

In a Kansas City Star op-ed on Sunday, Yoder insisted that his measure makes banking more secure.

"This fix actually makes banking safer -- specifically, the commodities markets for agriculture and energy producers -- while not exposing the American taxpayer to further liability," he wrote. "This is not to be confused with the transactions that are blamed for the 2008 meltdown -- those infamous credit default swaps on subprime mortgage-backed securities remain prohibited."

Yoder is simply wrong.

The provision allows banks to move risky financial trades through subsidiaries insured by the Federal Deposit Insurance Corp., making it hard to see how taxpayers won't be exposed "to further liability." And contrary to Yoder's claim, the law does apply to the kind of credit default swaps that plunged the financial system into the abyss in 2008.

Big banks and insurance giant AIG traded heavily in credit default swaps during the mortgage boom, effectively using the financial contracts to place trillions of dollars in bets on home loans and mortgage-backed securities, which ultimately imploded. This gamble was fueled by the trades' secrecy: Nobody knew who had agreed to what or how much their exposure was. Dodd-Frank required a new degree of transparency in the process, forcing credit default swap trades to be conducted through a central clearinghouse. This third party is responsible for guaranteeing each side of the bet, ensuring that if a bank can't make good on the contract, somebody will.

But not all credit default swaps are forced to go through this process. As a result, many "uncleared" credit default swaps are still washing around the financial system without market scrutiny -- just like the bets that blew up seven years ago. These uncleared swaps can receive taxpayer backing under the provision Yoder supported.

Lawmakers who opposed the change dismissed Yoder's defense.

"One thing he does not do is tell you how it makes it safer," Rep. Maxine Waters (D-Calif.), the ranking member on the House Committee On Financial Services who whipped votes against the spending bill in the House, told The Huffington Post. "If he believed that people really understood it, I don’t think he would make those kinds of statements."

Proponents of Yoder's measure argue that the profits from these derivatives trades could make banks more willing to invest capital in businesses. But critics warn that allowing banks to use taxpayer money to insure risky trades could lead to another financial crisis.

That concern led a handful of Democrats and Republicans to try to block the spending bill last month. The standoff highlighted a division between Democrats like Warren and the White House, which supported passing the spending bill even with the Yoder measure.

"It is inconceivable how anyone could claim with a straight face that repealing the 'prohibition against federal government bailouts of swaps entities' will make banking safer," Sen. Bernie Sanders (I-Vt.) said in a statement to HuffPost, referencing an explicit provision of the bill. "The way to make banking safe again is to break up behemoth Wall Street financial institutions so that they cannot cause another crisis that nearly destroyed the economy."

Plenty of other Democrats supported the pro-Wall Street provision. It was originally introduced as a stand-alone bill by Rep. Jim Himes (D-Conn.), who urged his colleagues to support it once it was added to the spending legislation.

HuffPost

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