The dust is slowly settling on the reconciled version of the banking reform bill, as we find out what deals have been made, what provisions were and were not gutted, what moderates were appeased, etc. Here has some of what has come across my desk:
(1) Mary Bottari of the Real Economy Project of the Center for Media and Democracy, and author of our most recent Economy in Numbers, was following and advocating for Blanche Lincoln's derivatives provision. Here's what she reported after the reconciliation (initially) went through:
The last day was a long one in the House-Senate conference committee on financial reform. The conferees had been at it since 9:00 a.m. and were rumpled and weary. Big bank lobbyists packed the conference room and trailed out into the hallways. As the clocked ticked into the wee hours, the chances for meaningful financial reform dimmed. At issue was the strong and controversial crack-down on derivatives trading authored by Senate Agriculture Committee Chair Blanche Lincoln (D-Ark).
TAXPAYER STILL BACK RECKLESS WALL STREET TRADING
At about midnight, House Agriculture Chairman U.S. Representative Collin Peterson (D-Minn.) offered an amendment to the Lincoln provision to require big banks to spin off (or push out) their derivatives desks into a separately capitalized affiliate. The Lincoln measure was geared toward ending taxpayer supports (FDIC insurance, Federal Reserve monies) for Wall Street gambling.
Under the Peterson language, the push-out provision was gutted. Some categories of trading were pushed out: including commodities (other than gold), equities, junk rated credit default swaps. The vast majority of OTC derivatives (approximately 90% were not pushed out.) These include interest rates swaps, foreign exchange trades, investment grade credit default swaps, gold.
This means that at the end of the day, taxpayers are still on the hook for the Wall Street casino. Taxpayers will be incensed to discover this the next time these trades go bad and blow up a "too big to fail" institution. The New Dem coalition and the New York delegation who pushed for this hatchet job must be held accountable in November.
However, a great deal of progress was made to bring derivatives out of the shadows and into the light of day. The fact that most derivatives trades will be cleared and exchange traded with capital requirements, margin requirements, positions limits, and real pricing is a big win for reformers* and will bring real transparency to the marketplace for the first time. These measures will make it much costlier to engage in speculation, plus regulators now have the tools to crack down on speculation. CFTC Chairman Gary Gensler, who had been critical of oil and gas speculation, now has the tools to pop these speculative bubbles when they occur.
FRANK FAILED TO PROTECT LOCALITIES
Lincoln also lost her battle to protect state and local government from bad swaps deals by applying a fiduciary responsibility to swaps dealers who sell to localities and other government entities. Activist have identified at least 71 localities who were sold sophisticated swaps. House Finance Committee Chair Barney Frank succeeded in gutting this provision and watering it down to a "code of conduct" requirement leaving states and localities more vulnerable to the Wall Street con.
BROWN BLOWS LOOPHOLE IN VOLCKER RULE
The Volcker Rule also took a big hit. The rule bans "proprietary trading" or trading for the bank's own account rather than for customers. The committee passed a strengthened Volcker rule by including the language prepared by Senators Merkley and Levin. The advantage of Merkley-Levin is that it covers more types of proprietary trading than the original rule proposed by the administration.
However, conferees blew a hole in the proprietary trading ban at the request of Senator Scott Brown (R-MA) whose vote may be needed in the Senate to pass the bill. The amendment allows banks to invest in hedge funds and private equity funds. The rule allows them to invest 3% of their private equity capital. This sounds like a small number, but this money can be hugely leveraged. So, for instance, Bear Stearns put $40 million into a hedge fund during the heyday of the housing bubble, and had to pony up $3.2 billion when that investment backfired in 2007- literally 80 times what they put into it. This may be one of the worst provisions in the bill and Brown was aided by the New Dem coalition in his fight to deliver this loophole to Wall Street.
FUTURE FIGHTS
The lack of progress on separating the taxpayer guarantee from the big bank derivatives trade leaves taxpayers on the hook for a future derivatives crisis. When these crises inevitably occur, they will give new fuel to measures such as that offered by Senators Brown and Kaufman to shrink the size of "too big to fail" institutions so that taxpayers will not have to go down with the Wall Street titans.
*Note of caution: much fine print still to be read.
Visit BanksterUSA to see Mary's latest reports as things shake out about the reform bill.
(2) Speaking of Mary Bottari, hat-tip to subscriber LF for pointing out this other piece by Mary:
Everyone in America remembers the summer of 2008 when gas prices rose to over $4.00 a gallon. The puzzling price spike caused hardship for many Americans, but it had a disproportionate impact on farmer given that energy costs are one of farmers biggest costs of doing business. A repeat of this scenario not only threatens consumer pocketbooks and farm livelihoods, but could be a serious set back to an already slow economic recovery.
That possibility just became much more remote due to some last-minute maneuvers involving the Wall Street reform bill slated to be voted on in Congress this week. The derivatives chapter of the bill specifically cracks down on the energy and food commodity speculation that elevates the cost of farming and socks it to consumers.
Read the rest of the report.
(3) We in Massachusetts are dismayed at the negotiations our new senator, Scott Brown (who campaigned as a "populist") has been doing on behalf of the Massachusetts-based banks like Fidelity and State Street. The latest was balking at the bank fee that made it into the reconciliation to pay for the new regulation. Brown forced the bill back into reconciliation and the fee is now gone. The regulation will now be financed out of TARP funds, and TARP will wind down earlier than it had been slated to. Find details in this article from today's New York Times.
—Chris Sturr