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Congress Could Enact Rollback Of Dodd-Frank Limits On Derivatives

Economy Politics Tribune News Service

Congress Could Enact Rollback Of Dodd-Frank Limits On Derivatives

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By Jim Puzzanghera and Lisa Mascaro, Tribune Washington Bureau (TNS)

WASHINGTON — Congress is poised to enact the first significant rollback of the sweeping 2010 overhaul of financial regulations by including in a government spending bill a provision that eases bank trading of complex derivatives.

The provision sparked controversy as lawmakers prepared to vote on the $1.1 trillion package that must pass before a Thursday night deadline to avoid a federal government shutdown.

Derivatives and other complex securities were blamed in part for triggering the 2008 financial crisis. New limits on their trading were a key component of the Dodd-Frank financial reform law.

The restrictions would force banks to spin off risky derivatives trading into separate units that would not be backed by federal deposit insurance and would not have access to low-cost Federal Reserve lending. Regulators still are working on fashioning rules to implement the restrictions.

Financial reform supporters were outraged Wednesday that the provision easing derivatives restrictions, based on legislation that passed the House in 2013 but never got a Senate vote, was included in the spending bill.

“This is by far the largest repeal of a significant financial reform provision since the crash,” said Dennis Kelleher, chief executive of Better Markets Inc., a Washington advocate of stricter financial regulation. “It shifts the downside of Wall Street’s high-risk derivatives-dealing back to the taxpayers.”

A coalition of key liberal lawmakers and advocacy groups scrambled to save the derivatives restrictions.

“We put this rule in place after the collapse of the financial system because we wanted to reduce the risk that reckless gambling on Wall Street could ever again threaten jobs and livelihoods on Main Street,” said Sen. Elizabeth Warren (D-MA). “We all need to stand and fight this giveaway to the most powerful banks in the country.”

Warren and Rep. Maxine Waters (D-CA), the top Democrat on the House Financial Services Committee, urged the House to yank the provision before Thursday’s vote.

But with just days remaining before Congress is set to recess for the holidays, changes appeared unlikely.

The overall spending bill was negotiated by leaders of the Republican-controlled House and the Democratic-controlled Senate. Republicans had wanted to include several other changes to Dodd-Frank in the funding bill, but Democratic leaders balked.

In a win for Democrats, Republicans agreed to provide more money to the Commodity Futures Trading Commission, which regulates the derivatives market. The agency’s funding would increase by $35 million to $250 million for the government’s fiscal year, ending next Sept. 30.

Major Wall Street banks, such as Citigroup Inc. and JPMorgan Chase & Co., handle the vast majority of derivatives transactions and lobbied hard to scrap the restrictions.

James Ballentine, executive vice president of congressional relations and political affairs at the American Bankers Assn., said banks have a broader concern.

“Folks are trying to paint this as, ‘This helps Wall Street,’ but we’ve had banks of all sizes saying this is going to impact them,” he said.

Derivatives, also known as swaps, can be used to offset in part, or hedge against, changes in foreign exchange rates or prices of commodities, such as oil and soybeans.

Republicans have argued that the restrictions would make it harder for business owners to use derivatives. Their proposal last year passed the House 292-122, with the support of 70 Democrats.

The provision is a “common-sense … bipartisan, House-passed reform that would protect manufacturers, farmers, ranchers and Main Street businesses from onerous regulations that will hurt our economy,” said Kevin Smith, a spokesman for House Speaker John A. Boehner (R-OH).

But derivatives such as credit default swaps were a major factor in spreading the contagion from defective mortgage-backed securities throughout the financial system.

“In 2008, we learned the economic consequences of conducting derivatives trading in taxpayer-insured banks,” said Thomas Hoenig, vice chairman of the Federal Deposit Insurance Corp.

The restrictions in Dodd-Frank are “an important step in pushing the trading activity out to where it should be conducted: in the open market, outside of taxpayer-backed commercial banks,” he said.

Hoenig said that banks now can keep almost 95 percent of derivatives, including those dealing with interest rates and foreign exchange, under the Dodd-Frank law. It focuses only on the riskiest derivatives, such as credit default swaps, he said.

Former Rep. Barney Frank (D-MA), co-author of the financial reform law, said derivatives regulation is “a legitimate subject for debate.” But the issue should be the subject of hearings instead of being included in a last-minute funding bill.

“This is a road map for the stealth unwinding of financial reform,” he said in warning about Republican efforts to make changes in a must-pass budget bill.

Republicans strongly opposed the Dodd-Frank bill and have been trying unsuccessfully to loosen some key regulations, such as weakening the new Consumer Financial Protection Bureau.

The party will have more clout next year after big midterm election wins last month gave it control of the Senate to go along with a strengthened House majority, said Edward Mills, a financial policy analyst at FBR Capital Markets & Co.

“It really does show the potential for significant changes now that Republicans have control of both the House and Senate,” he said.

Rep. Jeb Hensarling (R-TX), chairman of the House Financial Services Committee, was not part of the negotiations for the spending bill. But if he were, he said, “it would be open season on Dodd-Frank.”

Photo: Sebastian Alvarez via Flickr

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4 Comments

  1. 1standlastword December 11, 2014

    ““We put this rule in place after the collapse of the financial system because we wanted to reduce the risk that reckless gambling on Wall Street could ever again threaten jobs and livelihoods on Main Street,” said Sen. Elizabeth Warren (D-MA). “We all need to stand and fight this giveaway to the most powerful banks in the country.””
    **************************************************************************************
    Like I said after Paul Ryan introduced the virtues ‘dynamic scoring’…get strapped in folks the next republican sponsored economic crash is coming.
    Little by little, bit by bit they will induce a more risky financing landscape by loosening safe measures protective of our economic health until they cause another to-big-to-fail-to big-to go-to jail. And this is what happens when criminals don’t go to jail….They re-violate again and again.

    Reply
    1. robertbenefiel@att.net January 2, 2015

      Maybe the Republicans can provide our funds from Social Security to the banks to gamble with as well.

      Reply
  2. howa4x December 12, 2014

    This will be the new tactic of the republican majority, dismantling regulation tucked in budget funding bills. Republicans have clearly showed who their constituency is, banks, energy companies, insurance companies and Agra business to name a few. There is a difference for them this time. They will be the majority and any weakening of regulation that results in calamity or other problems will be laid at their feet with no where to hide. For once they will be held accountable for their actions.

    Reply
  3. robertbenefiel@att.net January 2, 2015

    Isn’t America great. Banks can again gamble with FICA bank funds and if they win, they keep the winnings, but if they lose, the taxpayer picks up the losses. To all the Republicans out there, congratulations to your party, you have delivered the goods to your constituents. Now if you can payoff the fossil fuel industry as well, maybe the Keystone pipeline, or eliminate the EPA.. Now that would be better yet.

    Reply

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