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Blog of Mass Destruction

2 Year "Study" Needed

By The Reverend Published: May 21, 2010

Arkansas Democratic Senator Blanche Lincoln knew she was in a tough primary fight from her left in the person of Bill Halter. Progressives had become fed up with Lincoln's corporate-favoring ways and helped Halter become a viable competitor. In the Arkansas primary on Tuesday, Halter successfully forced Lincoln into a special Democratic runoff election the first week of June. Today, Halter leads Lincoln by a couple polling points in the lead up to the special runoff election.

What I found interesting during this Lincoln-Halter battle was Blanche Lincoln's introduction of a derivatives regulation amendment to the just-passed financial regulation legislation. It just didn't, you know, feel right at the time.

That feeling was for good reason.

Senate Democrats knew Lincoln was in a tough political fight. How better to strengthen her chances in that fight than by bolstering her "anti-corporate crooks" street cred. Thus, Lincoln's amendment, which in essence, gave the perception that Lincoln was oh-so-serious about changing the very practice which played the most significant role in exploding the American economy.

Lincoln's amendment would, essentially, have....

".... force a handful of the nation's biggest banks to spin off their billion-dollar businesses in trading derivatives."

Which meant....

That would mean the (derivative) business couldn't rely on funds from a bank's existing balance sheet, nor would it have support from the Federal Deposit Insurance Corp. nor would it be eligible for taxpayer-financed bailouts.

Overall, the derivatives business would be undercapitalized, riskier and therefore more costly. A worst-case scenario would make the U.S. derivatives industry unviable.

Naturally, Big Banksters hated this.....and as Dick Durbin (D-IL) once truthfully said...."the banks own the Senate."

Here's a quick refresher on derivatives......

Derivatives are financial contracts whose price depends on the value of a separate asset, such as a stock or bond. Derivatives have been traded on Wall Street for decades, but they exploded in popularity over the past decade with the help of big banks, which reaped a windfall in fees for their services. Trading in derivatives exacerbated the recent financial crisis, inviting heightened scrutiny from lawmakers and regulators.

Lincoln's provision was still intact in the financial regulation bill until there were 3 minutes left in the amendment process on Tuesday. That's when Chris Dodd (D-CT) demonstrated that the Senate has no interest, at all, in modifying the very practices which brought our national economy to it's knees.

Dodd offered a clever Washington solution aimed to appease both friends and foes of the provision. His amendment preserves the tough language -- but it postpones any action for two years so it can be studied. And it assigns that study to a new council of regulators, headed by Treasury Secretary Timothy F. Geithner, whose members have serious reservations about such a dramatic measure and may very well kill it in the end.

With only 1 minute remaining in the amendment process, Dodd also introduced this....

...he submitted another provision dealing with yet another contentious and excruciatingly complex issue: prohibitions on certain types of risky derivatives known as credit-default swaps and "naked" credit-default swaps. Those rules, however, also wouldn't take effect for two years. And they, too, would require a ruling from the Treasury secretary on whether they should remain in place at all.

Those two late-entered changes were included in the final bill and the final legislation was passed in the Senate yesterday.

The source of the financial meltdown in America was mortgage derivative and credit default swap trading....gone wild. The Senate looked at those two "financial products", and how they are bought and sold......and concluded that more "study" was needed.

This is the point in the blog post where I sometimes use words like, "are you f*cking kidding me?"

Instead, I'll leave you with a slightly modified version of Dick Durbin's take....

"Banks DO own the Senate."

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