Tucked away in some early reports about a possible GOP deal
on creation of a stand-alone consumer protection agency is a hint of
what could be traded away in exchange–tough regulation of the kind of
speculative, unregulated financial trading that crashed the economy in
the first place.
The whole story is not much above gossip level yet. But Sen. Richard
Shelby of Alabama, the top Republican member of the Senate Banking
Committee, is floating the idea that he could accept an
independent Consumer Financial Protection Agency in a broad financial
reform bill–after saying for months that he wouldn’t. Of course, doubt about what he means by
independent. Given Shelby’s earlier parrot-speak of the banking
industry’s line, and hints that some other regulator would have veto
power over the consumer agency, "independent" starts to sound like a
lapdog on a six-foot leash.
But there’s also speculation that Shelby, by compromising on the
consumer protection agency, might be fishing for a deal that could be
even worse for consumers in the long run. Here’s how the New Republic magazine describes it:
For example, one of the most important but least understood parts of
the financial reform bill relates to derivatives, which are essentially
bets on the prices of other assets, like stocks and bonds. The credit
default swaps that brought AIG to the government’s doorstep are
probably the most famous example of the trouble-making potential of
this financial instrument. AIG’s derivatives portfolio was largely
a bet on bonds backed by mortgages. When the mortgages took on water,
the bet left AIG on the hook for billions in losses, pushing the
company to the brink of bankruptcy.
As written, the Dodd bill would require buyers and sellers of
derivatives to “clear” them. That means each side would technically
trade with a middleman—the clearinghouse—to whom they’d hand over
enough cash to cover bets that go bad. If AIG had imploded, it would
have stiffed the companies on the other side of its derivatives bets,
who might in turn have stiffed the companies they’d bet with, in an
ever-expanding chain of financial destruction. The hope is that
clearing will prevent problems at a future AIG from spreading this way,
so that the government doesn’t have to intervene.
For the last several months, the big banks, who make billions of
dollars trading derivatives, have tried to arrange it so that these
proposals would apply to as few transactions as possible. Their efforts
have been somewhat successful—the financial reform bill that passed the
House in December featured a reasonably broad exemption to the new
regulations (though the industry still has its share of gripes). But
the language Dodd moved through his Banking Committee last month is
significantly tougher, and the administration has expressed its support.
And, yet, when you talk to industry representatives, they don’t
appear overly troubled by the recent turn of events. Most continue to
regard the derivatives provision in Dodd’s bill as a placeholder, which
will almost certainly be nudged aside by a compromise negotiated by
Democrat Blanche Lincoln and Republican Saxby Chambliss. (The two
senators run the Agriculture Committee, which shares jurisdiction over
derivatives.) As one lawyer involved in the derivatives industry told
me last week, “If they try to push the Dodd bill as currently written
on derivatives—it can’t fly.”
What explains the serene confidence? “Derivatives is the tail on
this dog,” the lawyer continued. “It’s not what’s going to drive the
bill through Congress. Nor is it the filibuster point. Other stuff
makes a lot more noise.” The bottom line, this person concluded, is
that voters just aren’t very invested in the details of derivatives
reform, and so it’s hard to believe the Democrats will be, too: “Words
on the page are not that critical to the public. … The public just
wants to see something done here. … To some extent, passing a bill
[whatever the details] will be marketed as a success.”
Really? Consumers wouldn’t care? How about if derivatives trading is
explained by the example of energy commodity trading–the wild
speculation that drove the price of oil to the stratosphere in 2008,
and gasoline to $4.00 a gallon? Show me an American who doesn’t
understand $4.00 gasoline and what energy prices did to the economy.
Especially when energy commodities are once again being traded up on
pure speculation, and gasoline is back up to or near $3.00 a gallon in many states.
Foreclosure, job loss and the price at the pump. Billion-dollar bonuses
at Goldman Sachs. Consumers understand those all too well. And they’re
all linked to derivatives trading.
The New Republic goes on to quote Democratic sources who swear up and
down that nothing, especially derivatives regulation, would be traded
away for the consumer protection agency–that Americans know the stakes
of financial reform and Republicans don’t want to be labeled Wall
Street toadies in an election year.
But Sen. Blanche Lincoln of Louisiana is weak conservative Democrat
in the fight of her life to keep her seat. She might be willing to do
nearly anything to satisfy the huge oil and energy businesses in
So if anyone asks you what a consumer financial protection agency has to do with the price of gas, now you know.