We live in an era in which a sense of shame is for wusses. The banks and their trading partners created a world wide financial crisis, primarily through the use of unregulated financial instruments, such as credit default swaps. In the process they made a lot of money, much of which is up in smoke, replaced by taxpayer money. Anyone with any sense of shame or decency would be somewhat chastened. Not the bankers. According to the Times, they are in full lobbying mode (indirectly, of course, paid with our money) to defeat meaningful regulation of derivatives.
The method of choice is the old stand-bye: the build in loophole; the exception that swallows up the rule. According to the banks, some credit default swaps are so “customized” they can’t be priced on the open market. Therefore, rather than the obvious solution of banning such swaps altogether, they propose allowing things to remain just as they are for such swaps. As Senator Harkin points out, suddenly every CDS will be customized. The banks also want these instruments traded through an institution that is essentially a captive creature of the banks, all the better to escape meaningful oversight.
What’s galling, of course, is that the banks are trying to preserve financial instruments that yielded phony profits. Credit default swaps are like insurance contracts, except in the case of the CDS, the company took in the premiums, but when it came time to pay off, the taxpayers paid the bill. In the end there would have been no, or little profit, had the bailout never happened (look who got the money we funneled through AIG) and even with taxpayer help, as a bookkeeping matter, companies like AIG lost big time on these instruments. But the folks who packaged them- well, that’s a different story. They got fat paychecks and fat bonuses. So, strictly speaking, it’s not the banks (on behalf of their shareholders) that are doing the lobbying, it’s the bankers (on behalf of their paychecks).
This is where the rubber meets the road, and it’s an opportunity for Chris Dodd, who should be in the thick of this, to prove his bona fides. As is typical with Geithner, Obama’s terrible pick for treasury secretary, the Administration’s proposal is half hearted.
In truth, the recent credit card legislation, for which Dodd gets credit, was pretty feeble; it mainly requires that the credit card companies tell us in simple language exactly how they’re screwing us and stops some particularly egregious practices, but without rate limitations it doesn’t afford much real relief. The credit card issue was important, but this issue is bigger by several magnitudes, and if they don’t get the regulations right, we’ll soon be back where we are now, only in worse shape. If Dodd wants to show he’s for real, this would be an excellent place to start. Real, effective regulation of these financial instruments, along with outright banning some of them, is critically important. If Dodd can bring that about, then he’ll have accomplished something worth bragging about.
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