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Economic Outrage du Jour

December 29th, 2009, 04:12 am admin Leave a comment Go to comments

Congress caves. Surprise! Not.

Three weeks ago the House of Representatives passed a far-reaching overhaul of financial practices, including a new Consumer Financial Protection Agency to protect consumers from abusive lending practices, establish new trading rules and deal with the threat of too big to fail. It was heralded in some quarters as the biggest reform since the New Deal.

That may well be so, but the legislation goes not nearly far enough. Nowhere is this more evident than when it comes to regulating complex over-the-counter derivatives. I’ll bet you’re not wondering why. But you’re probably basing your view on mere suspicions about certain people being in the pocket of certain other people. The Wall Street Journal’s  Randal Smith and Sarah N. Lynch confirm it for you:

Lobbying by Wall Street has blunted efforts to step up regulation on derivatives trading by carving out exceptions or leaving the status quo in place.

Derivatives took blame for some of the worst debacles of the financial crisis. But a year after regulators and critics began calling for an overhaul in the way they are traded, some efforts have been shelved and others have been watered down. …

The two main issues concerning regulators were trading and clearing of swaps, which allow investors to bet on or hedge movements in currencies, interest rates and many other things. Swaps generally trade privately, leaving competitors and regulators in the dark about the scope of their risks. In November 2008, the chairman of the Senate Agriculture Committee proposed forcing all derivatives trading onto exchanges, where their prices could be publicly disclosed and margin requirements imposed to insure that participants could make good on their market bets.

When the legislation emerged on relatively close vote from the House on Dec. 11, however, those requirements were diluted or gone altogether.

A lawyer for one big Wall Street dealer said in an interview that the rollback from the first proposals in Congress was the result of an “educational” process by dealers and customers that resulted in “a grudging recognition” that many uses of derivatives didn’t fit such a strict approach. At one point, House agriculture chairman Collin Peterson (D., Minn.) said he suspected dealers had dispatched their customers to lobby Capital [sic] Hill.

When the mark-up begins on the Cantwell-McCain bill that would restore the protections of the New Deal’s Glass-Steagall Act, you can expect – at the very least – dilution again to be the order of the day. You don’t have to be a rocket scientist or a marxist to know why. Senator Dick Durbin said it in April:

And the banks — hard to believe in a time when we’re facing a banking crisis that many of the banks created — are still the most powerful lobby on Capitol Hill. And they frankly own the place.

Some give themselves fancier names than “bank.” But they still have us by the short hairs. And all it takes for them to maintain their grip is a little “educational” effort among the folks we’re told are elected to represent everybody’s interests.


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