Wall Street money floods D.C. to fight finance reform bill

May 24, 2010 by · Leave a Comment
Filed under: Policy News 

After reading through this MSNBC article, I found it really interesting that the tension is really coming down to derivatives regulation.  If  you have not been following our conversations on derivatives then here is a little refresher.   Derivatives, as the name implies are synthetic financial instruments that are created to either match performance of an instrument that it was derived from or provide some sort of performance if something happens to some underling asset.

They are basically contracts that have terms and they currently traded over the counter (OTC) in a unregulated fashion.  This may seem harmless until you find out the over $600 trillion dollars of these contracts exist according to the Bank of International Settlements (BIS).  In the light of them being unregulated, their are no capital requirements for holding loss reserves in case the financial institution that is holding this contract is on the wrong side of what ever bet they made.  The famous case of this destructive effect was the failure of American Insurance Group (AIG) in their record $180 billion bailout by the U.S. government.  They were issuing credit-default swaps which are basically corporate debt insurance on sub-prime loans.

As we saw, they went bad and because AIG did not carry adequate reserves against losses, when the market went down, so did AIG.   They were an insurance company but our commercial banks are also in the market and they are suppose to be our safest financial institution and that is why we regulate them so heavily.

It is very mis-guided if the banks and lobbyists get their way and take out the derivative regulation from the bill.  In effect we would be setting ourselves up for another crisis and it would be only a matter of time for the banks to get into some risky asset class and they have the market for them turn sour.   Call your representatives and explain to them why it is important to regulate derivatives and stop letting banks keep them off the balance-sheet and in the shadows.

The biggest flash point for many Wall Street firms is the tough restrictions on the trading of derivatives imposed in the Senate bill approved Thursday night. Derivatives are securities whose value is based on the price of other assets like corn, soybeans or company stock.

The financial industry was confident that a provision that would force banks to spin off their derivatives businesses would be stripped out, but in the final rush to pass the bill, that did not happen.

The opposition comes not just from the financial industry. The chairman of the Federal Reserve and other senior banking regulators opposed the provision, and top Obama administration officials have said they would continue to push for it to be removed.

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