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Working In These Times

Thursday, Apr 22, 2010, 7:55 am

Still at Risk: Derivatives Bill, Obama Speech No Guarantee of Real Financial Reform

BY Art Levine

After a year of non-stop GOP smears and lies about any reform bill—from the now-moribund Employee Free Choice Act to healthcare reform—the GOP this week walked back from its public declarations to block any financial reform legislation as a taxpayer "bailout." Now the GOP's policy leaders on financial regulation, such as Sen. Richard Shelby, the ranking Republican on the Senate Banking Committee, are saying, "We're very close to a deal."

Today, President Obama comes to Wall Street to make a final pitch for financial reform. But there are some dangerous remaining loopholes still supported by the Obama administration, let alone Republicans.

These include allowing the trading of economy-destroying derivatives by U.S. financial firms operating overseas, like the debt-hiding instruments that Goldman Sachs concocted for the cratering Greek government . There's also the lack of any serious measures to limit the size of big banks before they fail.

As Simon Johnson, the MIT economist, says at his blog Baseline Scenario:

If you want to rally the country against oversized banks that serve no productive purpose, you need to really end the Too Big To Fail problem - half measures simply will not convince people or rally sufficient support... the 'resolution authority' simply cannot work for large complex cross-border financial institutions.

Still, on Wednesday, the Senate Agriculture Committee, which also oversees trading in "derivatives" -- financial products or bets on underlying assets -- passed with one Republican vote the strongest measure yet aimed at making those often-shady investment vehicles openly traded.

In the wake of the SEC civil prosecution of Goldman Sachs for hoodwinking investors with derivatives, the GOP realizes, House Deputy Whip John Thune told reporters Wednesday, "Democrats believe that they can get political advantage by painting the Republicans as protecting Wall Street.... The perception right now is what's driving this." From the Swift Boating of John Kerry to "death panels," GOP politicians have been able to get away with selling anti-reform opposition to the public with any sort of Big Lie -- but not this time around.

Even so, despite the President's rhetoric you'll hear today and the new momentum for reform, you cannot be assured that we're on our way to protecting our economy from another meltdown. As Johnson contends:

The Democrats are afraid that if they truly take on the big banks, they will lose campaign contributions and be placed a major disadvantage for November 2010 and 2012 - "don't push it too far" is the message from the White House to the Senate. But this just shows the White House has not fully comprehended the modern nature of banking.

The banks are already coming after the Democrats. A pro-big bank group launched advertising yesterday against Harry Reid in Nevada, as well as in Missouri and Virginia; the media spend is eye popping. Neal Wolin (Deputy Treasury Secretary) already declared war on the Chamber of Commerce over consumer protection; the people behind the Chamber are not nice people and they are very angry about what they think will hurt their interests.

On the positive side, as Lisa Lindsley, the director of capital strategies for AFSCME, told In These Times, at least the derivatives measure that passed the Senate Ag Committee Wednesday is "pretty good and definitely better than the House version."

Yet even that is by no means assured of passage, and more loopholes were added Wednesday, including allowing lending institutions that are created by manufacturers, such as Ford or GM, to avoid derivatives regulation. Most businesses -- except major financial firms -- are already exempted as "end users" from having their derivatives trading from being evaluated and traded on open exchanges.

Worse, overseas trading of derivatives, even if created by U.S. investment banks, is being pushed as a way to protect the dollar by both the Obama administration and the GOP. So it's possible that if those crooked AIG products that blew a multi-trillion dollar hole in the global economy were traded in London, where its fraud-peddling derivatives unit was located, rather than the United States, the trading could continue unchecked.

As the liberals at Firedoglake warned: "Beware The Bipartisan "Deal" On FinReg." The article quotes The Hill newspaper:

Dodd, the chairman of the Senate Banking Committee, said he hadn't seen the specifics of a proposal that Sen. Blanche Lincoln (D-Ark.) passed out of her Agriculture Committee this morning in a 13-8 vote.

But reports have indicated that the White House would like to walk back some of Lincoln's strong language, which would force more disclosure on derivatives, and force firms to spin off their divisions which trade in the instruments.

The liberal skepticism towards the likelihood of achieving a strong bill is justified  -- unless there's enough of an outpouring of grassroots activism to strike Election Day fear into the hearts of legislators. But as Firdoglake's David Dayen says:

I don't know why people are talking about the Lincoln bill like it just got signed by the President. All accounts show that the President, or at least the Treasury Secretary, doesn't even support it, and now Dodd is trying to claim territorial control. This is the exact opposite of how it played out in the House of Representatives, where Agriculture Committee Chair Collin Peterson significantly weakened the derivatives legislation that came out of Barney Frank's FinReg bill. But in both cases, it appears the stronger language will get dropped.

The 200-group labor-backed coalition, Americans for Financial Reform, is working to strengthen the derivatives language when it gets to the floor, but it will be an uphill battle if the Obama administration is willing to settle for half-measures.

University of Maryland law professor Michael Greenberger, a former federal regulator, told the Roosevelt Institute recently just what's at stake in forcing the shadow banking world of derivatives trading into the sunlight --and his sound reforms are only weakly reflected in the derivatives measure that the President is vowing to support with a veto threat. "Reformers have to fight the Obama administration as much as they do Wall Street," he told the Roosevelt forum. "Franklin Delano Roosevelt must be rolling over in his grave."

You can see the video here, and, although dry, it's worth reading his full report on the Makemarketsbemarkets.org website. With Washington, D.C., swarming with lobbyists on this issue, he's not the one influencing most Senators. It's more likely that lobbyists will be able to weaken it enough to so it won't be fully effective, but include enough purported oversight to justify a vote for it.

But Greenberger knows what's really needed. After all, he tried to fight strongly for derivatives regulation in the '90s against some of Clinton's top economists, like Larry Summers, who now advise President Obama.

He sums up:

Unregulated Over-the-Counter [private] derivatives have been at the heart of systemic or near systemic collapses -- from the 1995 bankruptcy of Orange County; to the collapse of Long Term Capital Management in 1998; to the bankruptcy of Enron in 2001-2002; to the subprime meltdown and resulting severe recession in 2008, and now to the emerging sovereign debt crisis in Europe. After each crisis, governments worldwide proclaim that the OTC market has to be regulated for transparency, capital adequacy, regulation of intermediaries, self regulation, and strong enforcement of fraud and manipulation. But, aided by the passage of time, Wall Street always deflates those aspirations with aggressive lobbying. The present financial reform regulatory effort may be the only chance to get this issue right before the country devolves into a further financial quagmire with more bankruptcies and more job losses.

UPDATE: To boost the chances for stronger oversight, progressive groups are taking off the gloves and going for the jugular of GOP leaders. Take this new attack from Americans United for Change, one of the groups seeking to stir up support for tougher legislation by going after Republicans:

Shameless: McConnell to Fundraise Alongside Banking Executive a Day After Voting Against Regulating Shadowy Markets on Wall Street

Why Stop Now, Mitch?: Fundraiser Follows Reports That McConnell Shook Down Hedge Fund Managers for Campaign Cash at Private Meeting on Wall Street

Washington, DCEven as Republicans are reportedly backing away from attacking Wall Street reform, they’re still looking to big banks for marching orders.  After getting caught cozying up to lobbyists in New York City , the GOP’s leaders are now bringing Wall Street to them. Tomorrow, Republican Minority Leader Mitch McConnell will be co-hosting a fundraiser in Washington , D.C. along with financial industry lobbyists – a day after he voted against bringing transparency to secret Wall Street bets. Another co-sponsor of the event, to benefit Sen. George Lemieux’s (R-FL) Protect America PAC, is Wendy Grubbs, the vice president for Government Affairs at Citigroup, a bank that refused to take any blame for their part in bringing down the economy and costing 8 million Americans their jobs. The big bankers have never been shy about using Republicans to prevent any accountability for their actions, but it’s events like this which help remind us. (see Americans United for Change’s latest ad: Bailout Bandits)

Art Levine, a contributing editor of The Washington Monthly, has written for Mother Jones, The American Prospect, The New Republic, The Atlantic, Slate.com, Salon.com and numerous other publications.

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