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Wall Street’s Bad Dream


If only for a moment, things look a little sour for Wall Street.  Amid the SEC’s indictment of Goldman-Sachs and consequent reminder to the citizenry of the crookedness rampant in the financial “services” industry, a hitherto loyal ally, Senate Agriculture Committee chair Blanche Lincoln, has proposed legislation requiring major banks to divest themselves of their their vitally lucrative derivatives trading desks.  Only at the very end of the senate Democrats’ enormous 1408 page financial reform is there a hefty chunk of solace for the bankers, in the form of Section 1155, a generally unnoticed provision clearly mandating another taxpayer-funded bailout all round the very next time disaster strikes.

Although there may be a lifeboat ready for future emergencies, bankers are currently feeling “quite undone,”  one lobbyist with a fine eye for Wall Street’s Washington operations told me recently. “Lincoln’s proposal is their worst nightmare.  Up until now ‘reform’ has been going fine for them.  The administration and congress have largely been proposing what the banks wanted,” such as leaving them under the benign regulatory supervision of the Federal Reserve.  Thanks to masterly work by the lobbyists, it seemed  that the world would be kept safe for  derivatives trading operations.

True, Senator Chris Dodd’s “Restoring America’s Financial Stability”  bill makes popular noises about forcing derivatives trading into clearing houses and onto exchanges, but the big dealers were not unduly worried.  After all, they already controlled major clearing houses, such as ICE, the Intercontinental Exchange, and anything too unwholesome in Dodd’s banking committee bill could be purged in a companion bill emanating from the Agriculture committee.  CounterPunchers will recall that this was the tactic adopted in emasculating the derivatives-trading provisions of the house financial reform bill, which defined an exchange as two dealers talking on the phone.  Ready and apparently willing to supervise the same operation in the senate was Arkansas’ Lincoln.  “We always considered her reliable,” sighed my lobbyist friend.

But Lincoln’s re-election campaign is in serious trouble, not least because her primary opponent has been harping on Lincoln’s warm relations with Wall Street.  Even so, she had shown every sign of hewing to the derivatives traders’ policy of highlighting the requirements of “end-users” in making the case for keeping things as they are (in the dark, with no public disclosure of market prices, thus preserving the opportunity for profitable gouging of customers.)  “End users” in this context are businesses whichg in theory at least use the commodities they are betting on — thus Coca Cola might buy derivatives on the price of sugar to hedge on future prices.  Such corporations, wrangled into the Coalition for Derivatives End-Users by the bank lobbyists, dutifully broadcast the case that mandatory exchange trading would cramp their style and “hurt the consumer.”  In reality, the end-user argument has always been an almost total sham, since derivatives trading has been overwhelmingly a matter of speculation, with little discernable effect on the consumer – apart of course from the derivatives-induced financial crash.

Unfortunately for the banks, Lincoln was so energetic in touting the end-user line that even Timothy Geithner grew a little uncomfortable.  So, accompanied by Commodities Futures Trading Commission Gary Gensler,  Geithner called on the senator and brusquely informed her she was being “too soft”  on the issue.   Her reaction was not at all what the treasury secretary expected, still less desired.

Piqued beyond measure by his graceless approach, Lincoln not only abandoned the cause of the end-users altogether, but inserted the requirement, thermonuclear in its implications for the profitability of JP Morgan and others, that banks dump their derivative trading operations.  Adding insult to injury, the legislation clearly defines an exchange as a “trading facility,”  another unpleasant surprise for the banks.

Separating banking from “prop trading” is essentially what Paul Volcker proposed some months ago.  Although unveiled in one of those recurring moments when Obama wants to appear tough on Wall Street, the idea has barely been heard of since.  Now Lincoln has offered a means of implementing the “Volcker Rule”  and Geithner, the bankers’ friend, is reportedly not pleased. (Gensler is a different matter.  Of all the senior administration financial officials, he is the least respectful of and subservient to Wall Street, doubtless thanks to insights gained during his erstwhile career at Goldman Sachs.)

Sad to say, the proposal is far too sensible and necessary for the health of the financial system to be allowed to stand, and will doubtless disappear in some administration-brokered compromise in pursuit of republican votes.  The Dodd bill has already shorn the proposed Consumer Finance Protection Agency of  any putative independence, consigning it to the black hole of the Federal Reserve.

More recently, there are reports that the bill will be stripped of a provision requiring a levy on the “too big to fail” banks as an insurance fund in the event of possible future defaults.  However, anyone who believes official  trumpetings about ending mega-bank bailouts should take a look at the paragraph on page 1379:

“During times of severe economic distress,” it reads, the Federal Deposit Insurance Corporation  “shall create a widely available program to guarantee obligations of solvent insured depository institutions or solvent depository institution holding companies (including any affiliates thereof)…”

In plain English, this means that the next time they bring the system to ruin, the banks and bank holding companies will get bailed out by the taxpayers, just like this time.  However disgruntled they may feel, the banks are not undone just yet.

ANDREW COCKBURN is the co-producer of the feature documentary on the financial catastrophe American Casino.  He can be reached at




Andrew Cockburn is the Washington editor of Harper’s Magazine.  An Irishman, he has covered national security topics in this country for many years.  In addition to publishing numerous books, he co-produced the 1997 feature film The Peacemaker and the 2009 documentary on the financial crisis American Casino.  His latest book is Kill Chain: The Rise of the High-Tech Assassins (Henry Holt).

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