I’ve been telling you about the critical concessions in the last days of the FinReg conference committee. Let’s step back a second. This bill won’t end too big to fail. It won’t protect the country to enough of a degree in the event of the next crisis. But it could do some positive things that would head in that direction. It could balance the relationship between the country and the oligopoly of giant, unaccountable banks. It could give consumers a fighting chance to protect themselves from getting screwed repeatedly. And as a financial reform bill, it’s a pretty solid anti-predatory lending bill. Heck, I’d cleave those pieces off, support it as a standalone, and hail a good progressive victory.

Nevertheless, the attacks are coming from all sides. On the Senate side, conferees may create a carve-out to the Volcker rule today which could undermine it, allowing banks and bank holding companies to use a small amount of capital to put stakes in hedge funds and private equity funds (at the same time, Chris Dodd will offer part of the Merkley-Levin amendment to make some parts of the Volcker rule statutory and unable to be circumvented by regulators). On the House side, Barney Frank is working with some Blue Dogs to undermine the already-passed swipe fee rules to allow credit unions to increase the charges on their debit cards, essentially. The New Dems keep trying to kill the stronger derivatives language, warning that business may go overseas (what, you mean legalized gambling may no longer accrue inside the US economy? Can I buy a bankster a plane ticket?).

You may be wondering whether anybody inside Congress is working for stronger reforms. The answer is yes. Rosa DeLauro, Jackie Speier and Bart Stupak (!) put together a Dear Colleague letter calling for the strongest possible derivatives language from the conference committee. At the end of the day, if the derivatives title remains fairly intact from the Senate bill, that alone will give reformers a victory and could actually shrink that runaway sector. Experts who have looked at the House offer on derivatives are pretty OK with it – they did not try to break up Section 716, the swap spin-off provision, and the exemptions are extremely minimal, especially relative to the original House bill. What is needed now is the fortitude inside the caucus to keep it that way. That’s what this letter can provide.

UPDATE: Tim Fernholz tweets that, as expected, the Cantwell concern about the enforcement loophole on derivatives was addressed. As a result, she’s probably a yes vote on the bill if nothing else changes. So why should the Volcker rule be weakened to keep Scott Brown aboard? Cantwell can replace him on the vote, and voila!

In the letter, the trio of House Democrats say that “derivatives markets have long been under-regulated, and the Senate’s strong language would require nearly all standardized derivatives transactions go through public exchanges and clearing houses. This would bring essential transparency to a market that has traditionally been closed off to the public and government regulation.” They support the clearing and exchange trading requirements from the Senate bill, the real-time reporting requirements that would make the derivatives market an actual market, capital requirements (presumably the hard leverage cap of 15:1 put into the bill by Jackie Speier), the fiduciary duty requirement that would end market-makers trading on securities they sold, and Section 716. The implication here is that a failure to include these pieces would lead to an absence of support for the bill.

House members are being asked to sign on to the letter today. Here’s the full text.

June 23, 2010

Dear Conferees:

We write to urge you to preserve the strong Senate language regulating the derivatives markets in the final financial reform legislation. Effective regulation of the $600 trillion derivatives market is fundamental to our financial security because the significant unregulated over-the-counter market was a fundamental cause of the financial crisis and without change will remain an ever present danger. Effective regulation also is necessary because unchecked speculation in these markets causes price fluctuations in vital commodities including food and oil that hurt businesses and consumers.

Warren Buffett has called unregulated derivatives ‘financial weapons of mass destruction’ and Nobel prize-winning economist Joseph Stiglitz asserted, “If [Congress] fails to pass strict oversight of dangerous over-the-counter derivatives and swaps the U.S. economy will continue to be vulnerable to significant financial risk.”

In particular, we strongly urge you to preserve the following aspects of the Senate bill:

Broad clearing and exchange trading requirements to make the market safe

The Senate bill applies crucial elements of derivatives reform including requiring transparency and the posting of margin to make the system safer for approximately 90 percent of all trades. The House language would exempt 40 to 50 percent of transactions. Despite Wall Street claims to the contrary, the Senate language excludes businesses using derivatives trades to hedge commercial risk from these requirements, although it permits them to clear and exchange trade.

Where it differs from the House bill is in clearly limiting exceptions to commercial entities hedging commercial risk. The House language would allow financial firms to take advantage of the exceptions it provides, creating an enormous loophole, while the Senate language expressly prevents financial firms from doing so.

Reporting requirements that allow regulators and participants to understand the market

The Senate bill requires real time reporting to regulators and the public on transactions in the multi-trillion dollar derivatives market, allowing businesses that use swaps to shop around for the best prices, and ensure that regulators can monitor the markets to prevent systemic risk. Conversely, the House language would allow the public to see only “aggregate” data from swaps transactions. This means that businesses would not be able to access information to allow them to shop for best prices.

Capital and Margin Requirements

The Senate bill ensures that whenever a financial institution trades swaps there are clear capital and margin requirements to increase stability in our financial markets. We are concerned that the House bill’s ambiguous language creates a loophole that could allow any financial institution that is not ‘systemically risky’ to trade swaps without money to back up its trades.

Fiduciary Duty

Revised Senate language collaboratively drafted between the Senate Agriculture and HELP Committees imposes a heightened standard of care on swaps dealers when they give advice or recommend swaps transactions to government entities, pension funds, endowments, and retirement plans. This is essential to combating the kind of abuses that have left government entities and non-profits across the country struggling under staggering derivatives-related debts, and to giving essential protections to less sophisticated institutional investors, including pension funds and endowments, and the taxpayers and workers on whose behalf they invest.

Separation of derivatives market making from commercial banking (Section 716)

The Senate bill includes important provisions that remove the ongoing Federal subsidy to the derivatives businesses of the five large banks that dominate this market. This language will help ensure that taxpayers are not supporting this risky activity with deposit insurance or other benefits. It will increase transparency and safety by making sure that derivatives market making activities are separately capitalized. As a result, it will also redirect bank capital towards lending and investment in Main Street, rather than empty speculation.

It is crucial to ensure that the legislation is effective by closing the enforcement gap left when the Senate Banking and Agriculture Committee versions of the bill were combined, and ensure that rules cannot be evaded by clearinghouses simply refusing to clear trades that the regulators have ordered to clear. Rules to prevent domination of the clearinghouses by the biggest traders, like the language of the Lynch amendment in the House, in addition to the rulemaking authority on conflicts of interests provided to the regulators in the Senate bill are also important.

Thank you for your attention to these important issues.


Rosa DeLauro
Bart Stupak
Jackie Speier