On deck: the Merkley-Levin amendment/Volcker Rule that would ban proprietary trading by commercial banks. Next up: derivatives regulation, and a vote on the Lincoln provision to split swap desks from banking operations. It’s a sign of just how hard the industry is working to sink these two provisions that, on what’s supposed to be the final day of conference, it’s 2pm and the real discussion on this issue hasn’t even begun.
The Senate has by far the better bill here. But Wall Street-minded Democrats in the House are lining up to back their big supporter. Problem is, it’s getting less and less feasible, politically,
for a member of Congress to take the banks’ side on this. And Democrats are lining up to support protecting taxpayers from risky trading as well. Who still thinks it’s a good idea to let banks back up their risky trading, or trade for their own profit, with taxpayer-insured money?
The two issues are related – are we going to let our banks continue taking taxpayer-backed risks? – but they are not replacements for the other. The Volcker Rule (and the Merkley-Levin strenghtening amendment to make the rule mandatory) is about profit-making trades on banks’ own behalf. The Lincoln derivatives provisions (the so-called Sec. 716) would spin off banks’ swaps desks to separate the risky activities of these operations from the taxpayer-backed institution entirely. That frees banks from the implicit bailout that access to those funds provides. As Zach Carter notes at AlterNet, this would mean a real break in the banks "too-big-to-fail" armor.
Cue a recap of the AIG fiasco.
Some of the big issues:
Exchanges mean transparency. Regulators and the public must know just how many derivatives are out there, so we know what kind of risk they pose (that $600 Trillion shadow market didn’t work out so well for us last time).
Clearinghouses mean accountability. The clearinghouse is there to pay the bills if the counterparty defaults – no more need for a taxpayer bailout.
Capital and margin requirements. Since both bills exempts a select group of specialized derivatives from clearing requirements, the Senate gives the CFTC the ability to require these traders have a higher amount of money on hand to back up their, otherwise unsecured, trade.
Teeth – Regulators need the legal tools to unwind a trade that doesn’t follow the new rules.
(Download the coalition letter from Consumer Watchdog partner Americans for Financial Reform here.)