Derivatives. Remember those?
Warren Buffett called them “weapons of mass destruction”.
Newsweek called them “The Monster that Ate Wall Street” after the financial crash.
Congress promised to clean up the derivatives mess after the Wall Street casino nearly crashed the global economy in 2008. Dodd-Frank was passed a short time later, but the actual regulations took years to write and only some of them have started to be enforced since January. That's why this is so disheartening.
On Wednesday, however, Republicans and Democrats on the House Agriculture Committee approved seven bills that would roll back parts of the Dodd-Frank financial regulations.
So what do these measures do? They weaken Title VII of Dodd-Frank, which is the part that regulates derivatives.
First of all, let's face a simple fact: Dodd-Frank was nowhere near sufficient to regulate Wall Street.
It never came close to properly regulating the derivatives market.
Rob Johnson, former managing director at Soros Fund Management and chief economist of the US Senate Banking Committee, called it a “form of Wall Street protectionism” that would not “address the fault lines that OTC derivatives represent.”
Washington is actually
afraid of the TBTF banks that control the derivatives market, and there is good reason to wonder
who actually wrote the legislation.
Michael Greenberger, a University of Maryland law professor and veteran federal regulator, studied the House committee’s 187-page bill and detected the fine needlework of Wall Street lawyers. “It had to be written by someone inside the banks,” Greenberger said, “because buried every few pages is a tricky and devilish ‘exception.’
A well-informed Congressional source confirmed that the original language in the draft legislation was written by financial-industry experts. It “was probably written by JPMorgan and Goldman Sachs,” he told me, “and possibly the Chicago Mercantile Exchange.”
And yet the regulations that are obviously inadequate to begin with are about to be made even more toothless.
“The road to hell is paved with these bills.”
- Rep. Alan Grayson (D-Fla.)
Because I can't say it better myself, I'll use someone else's quote of outrage.
Yet in an era of partisan gridlock in the nation’s capital, Democrats and Republicans have come together to repeal or weaken those rules.
I won't bother to go into the details of these bills, as
others have already done that for me.
Why should this matter to you? Because last year the Obama Administration moved to have the taxpayer backstop to $1.2 Quadrillion derivatives market.
Little noticed is that on Tuesday Team Obama took its first formal steps toward putting taxpayers behind Wall Street derivatives trading — not behind banks that might make mistakes in derivatives markets, but behind the trading itself. Yes, the same crew that rails against the dangers of derivatives is quietly positioning these financial instruments directly above the taxpayer safety net...
To get help, they only needed to be deemed “systemically important” by the new Financial Stability Oversight Council chaired by the Treasury Secretary.
Last year regulators finalized rules for how they would use this new power. On Tuesday, they began using it. The Financial Stability Oversight Council secretly voted to proceed toward inducting several derivatives clearinghouses into the too-big-to-fail club.
It's amazing to think that the "reforms" that were supposed to prevent another taxpayer bailout of Wall Street has now been manipulated to provide an ever wider backstop of the casino known as Wall Street.
In the meantime, as recently as 2011 TBTF banks such as Bank of America were
dumping toxic derivatives on the taxpayer.
Even without the inevitable derivatives meltdown that is sure to come, the poison of the derivatives market that is killing America can be found everywhere. Just look at Detroit.
The only winners in the financial crisis that brought Detroit (9845MF) to the brink of state takeover are Wall Street bankers who reaped more than $474 million from a city too poor to keep street lights working.
The debt sales cost Detroit $474 million, including underwriting expenses, bond-insurance premiums and fees for wrong-way bets on swaps, according to data compiled by Bloomberg. That almost equals the city’s 2013 budget for police and fire protection.
Banks have been reluctant to negotiate lower termination payments for many municipal governments. Last year, Detroit’s water and sewer utility borrowed to pay more than $300 million to unwind swaps.
The failure of Washington to reform the financial markets extends beyond just derivatives. Just look at the Republican whipping boy for the meltdown: Fannie Mae and Freddie Mac. After $137 Billion in taxpayer bailouts, the GOP vowed to shut these nationalized companies down. So what has happened?
Nothing.
Last fall, the regulator charged with overseeing Fannie and Freddie estimated that the taxpayer bill for the companies could be $200 billion by the end of 2015.
Still, Washington has shown little interest in winding down Fannie and Freddie. The ostensible reason is that there would be no mortgage market without them; private lenders are still unwilling to make home loans that they want to hold as investments, so Fannie and Freddie still have to buy or guarantee them.
But doing nothing also serves other interests. Since 2011, any increase in the guarantee fees the companies receive when backing a mortgage goes to the Treasury, not to repay taxpayers. The companies, therefore, have become a government piggy bank.
We have a do-nothing Congress when it comes to protecting the voter and taxpayer. But it moves with lightening speed when it comes to protecting Wall Street bankers.
So perhaps calling them "do-nothing" isn't correct. They do plenty when the price is right.