“Section 716 of the Dodd-Frank financial reform act requires that some derivative transactions be “pushed-out” from those part of banks that have deposit insurance (run by the Federal Deposit Insurance Corporation) and other forms of backstop (provided by the Federal Reserve). This is a sensible provision that, if properly implemented, would help keep our financial system safer, protect taxpayers and reduce the likely need for bailouts.
“Now, at the behest of the biggest Too Big To Fail banks and as part of the House’s spending bill (to be voted on tomorrow or in coming days), this “push out” requirement is on the verge of being repealed. Democrats and Republicans should refuse to vote for the spending bill as long as it contains this requirement.
“This is not a left vs. right issue. It is a fundamental systemic risk issue, on which people across the political spectrum who want to lower those risks can agree – Section 716 should not be repealed. In fact, some of the sharpest voices on this issue come from the right.”
“This is not what Citigroup, JP Morgan, Bank of America, or Goldman Sachs wants, of course. They want government insurance and their derivatives dealing to be subsidized by taxpayers, on the most favorable terms possible: it lowers their costs and increases their profits. As a result, Too Big To Fail banks’ executives and traders get the upside when things go well; and when things go badly, the downside is someone else’s problem.
“Or, as Dennis Kelleher of Better Markets puts it,“If Wall Street gets the upside in big bonuses from its high-risk derivatives deals, then it should also have to pay the downside for any losses.”
Read the full The Baseline Scenario article by Simon Johnson here.