May 19, 2010

Financial Reform...It's Complicated (Transferred from short-lived DCP blog)

The national Coffee Party page on Facebook this morning reports on an amendment Senator Christopher Dodd is trying to attach to the Financial Regulation bill that would remove the derivatives spin-off portion requiring that the largest banks spin off their derivatives desks into regulated entities not guaranteed by taxpayers. He proposes to instead have the issue studied by a group of regulators whose members have "serious reservations about such a dramatic measure," and may try to kill it.

According to The Washington Post, it isn't just banks who are against the derivatives spin-off; regulators and officials in the Obama administration believe it "could drive the business into the shadows." Is this spin from Wallmerica or are those in agreement with Dodd's amendment correct in their assertion that the spin-off "would harm U.S. competitiveness or lead to less regulation of the derivatives market, valued at half a quadrillion dollars"?

The Coffee Party has taken a stand against the Dodd amendment and asks that you consider using a letter from Americans for Financial Reform (AFR) that you'll find below as a template for those interested in writing your senators. If instead of a letter or email you wish to call your senator, please consider using the bullet points contained in the following when contacting the U.S. Capital Switchboard at (202) 224-3121.

Given that we live in a global economy, I thought I'd share what the European Union is doing about derivatives. According to an AP article on Yahoo News, new rules will increase oversight and set fines for manipulating trades. The European market for "largely unregulated" derivatives is worth $600 trillion. Key to the new rules is the registration of "all products and trading" so that regulators can access the derivatives...and the investors behind them because, "These people don't like coming out in the light so we are going to flood them with light," said EU Financial Services Commissioner Michel Barnier.

But back to the American market for the moment, and the AFR letter...

Dear Senator,

The over 250 consumer, employee, investor, community and civil rights groups who are members of Americans for Financial Reform (AFR) write to express strong support for Section 716 (“Prohibition Against Federal Government Bailouts of Swaps Entities”) and our opposition to the new Amendment #4110 to replace the provision with a study. The study would put the final decision over implementing this important new structural reform in the hands of regulators who have already publicly expressed their opposition to it.

The following are rebuttals to the primary arguments that have been advanced against Sec. 716:

  • Swaps Desks will Remain within the Bank Holding Company: Sen. Lincoln has clarified that the amendment would only separate derivatives desks from the core bank within the bank holding company – that is, the insured depository institution that has access to the Federal Reserve window. Moving these operations outside of the federally-protected core of the bank will only reduce the risk of future bailouts, still enabling the holding company to benefit from this lucrative business.

  • 716 Will Not Lead to Weaker Regulation or Flight Overseas: Americans for Financial Reform is committed to bringing derivatives out of the shadows; we would not support a provision that weakened oversight of derivatives dealers. Under the derivatives title, any major swap participant will be subject to oversight and safeguards for capital adequacy, transparency, anti-fraud and anti-manipulation. In addition, the claim that the market will migrate overseas ignores the economic turmoil in Europe that was in large part exacerbated by unregulated derivatives activities.

  • Derivatives Dealing is Not the Usual Course of Banking: Some have argued that derivatives selling should remain within the core depository institutions because it is part of the “usual business of banking”. If that were the case, then why do only 5 out of America’s over 8,000 banks – the Wall Street banks JPMorgan Chase, Citigroup, Bank of America, Goldman Sachs and Morgan Stanley – account for over 90 percent of this market? The “usual” banking businesses in the U.S., represented by the Independent Community Bankers Association of America, support Sec. 716.

  • Banks Can Still Use Derivatives to Hedge Their Risk Under 716: Separating swap dealing operations from the business of banking does not mean that banks will be unable to hedge their banking risks. They will be customers and trade on open exchanges and clearinghouses.

  • Purely speculative financial derivatives now represent $78 for every $1 in true hedging by businesses and farmers. By quarantining highly risky swaps trading from banking altogether, federally insured deposits will not be put at risk by toxic swaps transactions. Moreover, banks will be forced to behave like banks, focusing on extending credit in a manner that builds economic strength as opposed to fostering worldwide economic instability.

    For these reasons, Americans for Financial Reform urges you to oppose Amendment #4110. Please contact Lisa Lindsley, Director, Capital Strategies, AFSCME, for more information.

    Americans for Financial Reform

  • ~Laurie G


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