SALON

Wednesday, May 12, 2010 1:13 PM UTC

Blanche Lincoln to the rescue

The Arkansas senator's proposal for derivatives reform is better than anything else out there

By

Topics: Bank Reform, Blanche L. Lincoln, D-Ark., Wall Street

Right now, the biggest battle in bank reform is over a provision introduced by Senator Blanche Lincoln of Arkansas that would force the giant Wall Street banks to give up their lucrative derivative trading businesses if they want the government (i.e. taxpayers) to continue insuring their commercial deposits.

The five biggest Wall Street banks have had the derivatives market (derivatives are bets on whether the price of certain assets will rise or fall, bets thereby “derived” from asset prices) almost entirely to themselves. Last year their revenues from derivatives trading totaled a whopping $22.6 billion. Their advantage comes from their large size, plus government insurance of their commercial deposits that allows them to raise money more cheaply than other financial institutions.

Derivatives lie at the point where the basic saving-and-lending function of commercial banking meets the private casino of Wall Street investment banking. You and I subsidize the biggest players in the casino who, precisely because we subsidize them, have grown too big to fail. The Glass-Steagall Act once prevented the casino from using commercial deposits, but since 1999, when Glass-Steagall was repealed, the game has exploded. That’s part of the reason the giants on Wall Street could make wild bets that ended up threatening the entire economy, costing millions of Americans their jobs and savings, and requiring a massive taxpayer-financed bailout.

Lincoln wants to force the banks to put their derivatives into separate entities that aren’t subsidized by you and me. This is just common sense. Her move would also end the big banks’ monopoly over derivatives, thereby reducing their risk to the financial system. It would also cut dramatically into the big banks’ profits.

Obviously, the big banks are apoplectic about Lincoln’s measure and will do almost anything to strip it from the Dodd bill. The banks have 130 registered lobbyists, countless unregistered ones, 40 former banking staffers, and at least one retired senator (Trent Lott) crawling over Capitol Hill, arguing that Lincoln’s provision would be the end of civilization as we know it.

They also seem to have ensnared Paul Volcker. Late last week Volcker opined that commercial banks shouldn’t be barred from dealing in derivatives because derivatives are an important aspect of commercial banking; they hedge (that is, provide insurance against) risks associated with interest rates on loans. It’s an odd argument. If derivatives were as essential to the normal practice of lending as Volcker says, you’d expect every commercial bank to be dealing in them instead of just the five giant Wall Street behemoths.

As to the risk you and I might be left holding the bag again, Volcker says not to worry: His own rule now contained in the Dodd bill, preventing bankers from making bets for their own accounts, would take care of that. But Volcker’s rule would not erode the giant banks’ monopoly over derivatives trading — making them too big to fail. By contrast, Lincoln’s provision, by pushing derivative trading out of commercial banking, would remove the big banks’ artificial advantage, resulting in more competition and a better capitalized derivatives market.

Another argument being disingenuously used by Lincoln’s opponents is her measure would push derivative trading into unregulated shadow markets. That’s nonsense. Derivatives would have to be traded through a central clearinghouse or exchange, and every dealer in derivatives would still have to be registered and regulated by the Commodity Futures Trading Corporation or by the SEC.

So what are Lincoln’s chances? All the big guns are aiming at her. Lobbyists are lined up against her. Republicans and many Dems who want to do the Street’s bidding are eager to get rid of Lincoln’s measure. But she has two things going for her. First is the awkwardness for the White House if the President were to come out explicitly against her. For many weeks the Administration has talked about the importance of being tough on derivatives. The President has even said he’ll veto any bill that doesn’t go far enough regulating them. Now Lincoln is giving the White House a chance to prove its mettle or show itself to be pandering to the Street on one of the biggest reasons the Street almost melted down in the fall of 2008.

The second advantage Lincoln has is her measure passed her committee with so much momentum — including the votes of every Dem on the panel and one Republican — that it’s been included in Dodd’s overall financial reform bill. While it’s always possible for opponents of reform to hide when amendments are voted down, it’s much harder to hide when trying to strip a provision from a bill. Democrats who want to do so will have to join Republican Senators Judd Gregg, Saxby Chambliss, and Bob Corker, who already have introduced an amendment to accomplish this on behalf of their Wall Street patrons. The public will be able to identify which Senate Dems care more about Wall Street’s campaign donations than the public good.

Volcker has given these Dems, and the White House, some cover. But the public is watching closely. Some cover may not be enough.

Robert Reich

Robert Reich, one of the nation’s leading experts on work and the economy, is Chancellor’s Professor of Public Policy at the Goldman School of Public Policy at the University of California at Berkeley. He has served in three national administrations, most recently as secretary of labor under President Bill Clinton. Time Magazine has named him one of the ten most effective cabinet secretaries of the last century. He has written 13 books, including his latest best-seller, “Aftershock: The Next Economy and America’s Future;” “The Work of Nations,” which has been translated into 22 languages; and his newest, an e-book, “Beyond Outrage.” His syndicated columns, television appearances, and public radio commentaries reach millions of people each week. He is also a founding editor of the American Prospect magazine, and Chairman of the citizen’s group Common Cause. His widely-read blog can be found at www.robertreich.org. More Robert Reich.

Next Article

You Might Also Like

More Related Stories

Featured Slide Shows

Gripping photos: The people of the Turkey protests (slideshow)

close X
  • Share on Twitter
  • Share on Facebook
  • Thumbnails
  • Fullscreen
  • 1 of 11
  • The protests take on a festive element as police forces move out of the park and square. Wearing a gas mask, this young man dances to traditional Turkish music in front of Taksim Square’s Ataturk Monument.

  • In Gezi Park since March 31st, this protester, originally caught off-guard by the Government’s teargas and water cannons, went out and bought a Russian army mask from WWII, preparing for what was to come.

  • This rambunctious boy seems to be enjoying the chaos. After taking this picture he threw a stone at the already destroyed building in the background.

  • Forming a line, the police face off directly with protesters in Taksim Square. After a while, they retreated and there was a general cheer – a back-and-forth dance that has been common since the beginning of this protest.

  • An elderly woman in Gezi Park reads the news. The tent community occupying the park was violently destroyed on June 16th.

  • Many different groups had set up booths to promote their cause in Taksim Square and Gezi Park. Standing in front of one, this man waves his flag while posing with conviction.

  • Many home-remedies are used to minimize the effects of tear gas. This woman has put a milky solution on her face, removing her mask after the tear gas dissipated. Before sunrise, the police came again for another round of teargasing.

  • People capitalize on the uprising -- selling flags, beer, gas masks, sky lanterns and spray paint to name just a few of the popular items.

  • On Monday morning, June 11, the police execute a strong offensive. Many plain-clothed police officers, like the ones seen here, clash with protesters in the side streets away from the main stand-off in Taksim.

  • The authorities seem to be most aggressive in the night, pushing protesters away from the square and park. After being teargassed this young woman catches her breath with other protesters on Siraselviler Street.

  • Recent Slide Shows

  • Share on Twitter
  • Share on Facebook
  • Thumbnails
  • Fullscreen
  • 1 of 11

Related Videos

More Related Stories

Comments

 11 Comments

Comment Preview

Your name will appear as username ( settings | log out )

You may use these HTML tags and attributes: <a href=""> <b> <em> <strong> <i> <blockquote>

After thirty years in which the principle that markets know best ruled economic policy-making in the United States, the great financial crisis of 2007-2008 brought the deregulatory era to a shrieking halt. The challenge now facing lawmakers and the Obama administration is whether they can craft a new set

of rules that will prevent an out-of-control Wall Street from dragging the entire global economy into the gutter once again.
But expectations for bank reform are low. The proposals being debated in Congress don't do enough to solve the problem of too-big-to-fail financial institutions, or to protect consumers. Even worse, to gain enough Republican votes to guarantee passage, Democrats will likely make compromises that further weaken the bill. Despite the greatest financial crisis in more than 70 years, the U.S. government still doesn't have much appetite for meaningful reform.
See also: Bank Bailouts, Ben Bernanke, Goldman Sachs, Mortgage Crisis, Timothy Geithner, U.S. Economy, Wall Street

Continue Reading

follow salon

Most Read

Popular on Reddit

links from salon.com

From Around the Web

Presented by Scribol
listener_new_rect The Listener: "We Are All Completely Beside Ourselves": Growing up primate

Recommendations