The Battle Against Letting Wall Street Continue to Make a Killing on Derivatives By Art Levine, AlterNet. Posted October 21, 2009. http://www.alternet.org/workplace/1...eet_continue_to_make_a_killing_on_derivatives Early in the morning, outside the House Financial Services Committee hearing room in the Rayburn office building last week, there were scruffy ex-homeless and other low-income folks, wearing their dreadlocks or sloppy jeans, mixed in with the pinstriped reps for the financial industry. They all seemed to be lining up to see what $223 million in financial lobbying in the first six months of this year could buy in thwarting real reform on Capitol Hill. And they were hoping to get the few dozen of the public seats available inside the room, for a critical 10 a.m. hearing marking up a bill that was supposed to regulate the now-private market in complex "derivatives." Those derivatives are nominally worth at least $450 trillion worldwide, with $555 billion in credit at risk in the U.S. banking industry. (Derivatives are forms of insurance or bets on underlying assets, such as now-toxic subprime mortgages, supposedly designed to manage risk.) No wonder Warren Buffett called them "financial weapons of mass destruction." The derivatives bill is a cornerstone of the Obama administration's already-weakened reform plans that include a Consumer Financial Protection Agency facing a final vote this week. On the Sunday talk shows, administration officials blasted Wall Street executives for paying big bonuses. But their rhetoric on pay hasn't been matched by a unified, strong effort to rein in unregulated derivatives trading, Hill sources say, such as the toxic "credit default swaps" AIG used to help sink the economy. And with $15 billion in profits from derivatives trading in the first half of 2009, according to Treasury Department figures, it's still a major source of huge bonuses for investment bankers. But instead, the administration has put its shrinking political capital behind saving the CFPA this week from the assaults of Republicans, the Chamber of Commerce and community bankers who claim, as usual, that it means job-killing over-regulation. And it seems to have paid off: A sweeping amendment proposed by centrist Democrat Rep. Melissa Bean, D-Ill., to preempt tougher state enforcement seems, surprisingly, likely to fail. Yet the administration's purportedly high-priority agency legislation is already much weaker on protecting consumers from fraudulent or confusing loans than originally proposed. In addition, nothing in the current slate of embattled reform measures under consideration directly address either the foreclosure crisis or the ongoing credit shortages that are still costing jobs and homes. Their goal, in theory, is just to prevent future abuses. And by the time the derivatives bill was finalized last Thursday, that legislation also bore little resemblance to the original White House proposal in June to regulate most derivatives on public exchanges designed to create transparency . "The whole bill essentially has so many loopholes for every rule, it not only puts us back where we were in August 2008, but the banks have eliminated what little [derivatives] regulation existed, so we'll arguably be in worse shape than before Lehman Bros. failed," says Michael Greenberger, the former director of trading and marketing for the Commodity Futures Trading Commission and a University of Maryland law professor. So what the hell happened to the White House's apparently good intentions to regulate derivatives, and what does it all say about the likely fate of financial reform after the worst economic crisis since the Great Depression? And what about those poor people turning out to see the mark-up: Were they a nascent sign of a growing populist revolt against banking CEOs who took $17.5 trillion in federal bailouts, loans and guarantees with no strings attached after wrecking the world economy? Meanwhile, the nation is still reeling from a credit crisis that has cost millions of jobs and homes. In truth, the down-and-outers in the narrow hallway were there as placeholders in the line for the most elite lobbyists and Washington representatives of the even bigger, post-meltdown investment and commercial banks like Goldman Sachs and J.P Morgan Chase; such firms are now on track to pay their employees a record $140 billion this year. So, the sleek, blond J.P Morgan lobbyist in a smart gray suit set off by a brightly colored scarf was able to saunter in shortly before the doors opened for the hearing to see just how many more loopholes could be added. (She declined to identify herself.) Like the evicted family in Michael Moore's new film being hired by the bank to clean out their own home, the banking-industry lobbyists in Washington have at long last created the ultimate trickle-down effect from the bailouts: hiring the jobless ( for $11 to $35 an hour) to hold their places in line to make sure there's no effective federal crackdown preventing more job-destroying speculation in credit default swaps and other derivatives. (In fact, commercial banks earned over $5 billion by trading derivatives in the second quarter of this year, up 225 percent from the same period last year.) How quickly Wall Street chooses to forget. Heather Booth, the director of the Americans for Financial Reform coalition, observes: "Unregulated derivatives trading was a major cause of the economic crisis and loss of homes, jobs and retirement savings." Before the vote, Booth, whose coalition represents 200 labor, community and advocacy groups, told me, "This is a David-and-Goliath fight. The biggest banks that created the circumstances that led to greater misery -- people losing their jobs and seeing their communities deteriorate -- those circumstances have not been changed and there needs to be real reform and structural change." It's quite an uphill battle, but here is what's new this time in fighting for financial reform, Booth observes: "In the past, there never was anyone to push back on anything; now there is." Indeed, a Hill staffer supporting financial reform told me, "What's been frustrating for Democrats is the lack of support we get from the progressive community. This year, with the Americans for Financial Reform coalition, we've had better grassroots response than we've seen for years [on these issues]." Another Hill aide notes that the contacts on financial reform from hometown bankers and businessmen are now being matched by nonprofits and advocacy groups in the legislator's district, focused overwhelmingly on the financial protection agency. But national consumer groups and labor leaders, including the AFL-CIO's Richard Trumka, have made their case for tough regulation of derivatives directly to Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee; Trumka even placed a phone call to Frank on the morning the mark-up began. But the complex-yet-critical issue hasn't generated public interest, especially with so much effort focused on health reform: "It's not easy explaining the differences between [swaps] exchanges and clearinghouses," one activist complains about these arcane topics. And Booth's group didn't even hold its first news conference until July, while the financial industry sabotaged earlier this year a series of House-passed reforms in the Senate. These included bills to limit predatory lending and to force banks to let judges "cram down" renegotiated mortgages to keep people in their homes. In April, when public anger at the banking industry's role in the meltdown was far stronger, Sen. Dick Durbin, D-Ill., couldn't even get 60 votes to overcome a filibuster against his mortgage-foreclosure reform measure. He said of the banking industry: "Frankly, they own the place." At first glance last week, that certainly seemed to be the case when House Financial Services Committee members ultimately passed a bill that apparently only sought to regulate banks trading in derivatives in proposed stock-market-type "exchanges." Thanks to assorted business-friendly weasel words in the measure, the bill exempted almost everyone else from full-scale transparency and financial requirements, including potentially such major players in the "shadow market" as private equity and hedge funds. One key semantic loophole exempts any "end user" firm, such as a farm or manufacturer, that "hedges risk" by using a derivative, but critics say it's so vaguely worded it could allow non-banking financial firms like hedge funds to escape oversight, too. Moreover, Greenberger and other critics note, the bill even lets the private sector's own "clearinghouses" that assess financial risk determine for themselves which deals should get regulated. Amazingly enough, he says, it also flatly bars any state or federal agency from stopping risky deals before they take place. Would this new legislation prevent another AIG disaster? "No," Greenberger says bluntly. In contrast, the House committee released a statement declaring: "The House Financial Services Committee today approved legislation that would, for the first time ever, require the comprehensive regulation of the over-the-counter (OTC) [or private ] derivatives marketplace." Before this bill passed the committee, Booth and leading analysts say, about 90 percent of derivatives trading is concentrated in the hands of five major banks, with 95 percent of that business unregulated. Continued..