Friday, May 14, 2010

Bank Reform

JP Morgan Chase, Goldman Sachs, Bank of America, Citigroup and Wells Fargo invest over 6 million dollars to defeat major bank reform.

The nation's five largest and (as consumers feel), least credible banks which currently dominate the derivatives market; are in Washington armed with carpet bags full of cash. They have marshaled a contingency of trade groups, paid lobbyists and their own executives to convince senators that excluding banks from the derivatives business would make markets less safe.

Just how, is a curious oddity?

The banks reason, that the derivatives are a way of protecting their investments from failure, as they lay off the question of performance on third parties, like AIG for example, well that may be a bad example! But we get the point.

But the notion of excluding banks from the derivative market isn’t the issue. The issue is regulation and transparency of this 100 trillion dollar market.

The financial legislation proposed by the Obama administration and as passed by the House would require “most derivatives” to trade on public exchanges, in the belief that a transparent marketplace will be safer and cheaper. The scope of the exchange trading requirement has been the focus of the debate for months. Opponents argue that the bill would limit the industry's ability to customize derivatives to match the needs of clients. But in most cases they are their own client, except when they sell an instrument that an investor questions.

But, so far it has been the banks that have made small fortunes from the derivatives market, the most recent reminder AIG counterparty contracts with these same 5 banks receiving a concealed bailout from the Obama administration, and timothy Geithner’s requirement that AIG pay the banks 100 cents on the dollar. (Another story here)

According to the Office of the Comptroller of the Currency, Banks reported $22.6 billion in derivatives revenue in 2009. No doubt they used taxpayer bailout money to invest. Goldman Sachs was paid $13bn alone from AIG in 2009

Derivatives are contracts whose value is determined by something else. Trading in derivatives is dominated by these five banks, they were largely used in connection with Mortgage securitization instruments and were a form of insurance against a mortgage default, it is because of this “insurance” that the banks were made whole after a borrower defaulted, and it is because of these same instruments that the banks have NO incentive to work out a loan modification with a defaulting borrower, as they are made whole by these CDS’s (credit default swaps)

The five banks together have assembled more than 130 registered lobbyists, including 40 former Senate staff members and one retired senator, Trent Lott to water down and in most cases, (after their success in defeating the most concerting elements of the reform bill circulating congress), to defeat the latest round, unregistered Derivatives. Included in the list are also former staff members for the Senate majority and minority leaders, the chairmen and ranking members of the banking and finance committees, and more than 15 other senators.

The real issue and the one the banks are prepared to fight no matter how much money they have to throw at our congress, is control of their industry, this is something they will not tolerate, and after all they “are” the real masters of Washington .