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December 17, 2014

So banks are too big to fail. Are they also too big to regulate?

“Congress has agreed to use federal deposit insurance, which was designed to protect the savings accounts of consumers, to cover risky trading by the nation’s biggest banks.

“In a small provision in the budget bill, Congress agreed to allow banks to house their trading of swaps and derivatives alongside customer deposits, which are insured by the federal government against losses.

“The budget move repeals a portion of the Dodd-Frank financial reform act and, some say, lays the groundwork for future bailouts of banks who make irresponsibly risky trades.

“It’s both a stealth move and indefensible,” said Dennis Kelleher, the head of Better Markets, a group that argues for great oversight of banks. In a note to clients, he later called it “a sneaky, midnight repeal”.

“The White House said on Wednesday it “strongly opposes” the provision.

“The main purpose…is to reauthorize the Terrorism Risk Insurance Program; this bill should not be used as a vehicle to add entirely unrelated financial regulatory provisions,” the White House said.

“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,” Kelleher wrote.”

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“Other derivatives, however, could still sit in the section of the banks protected by government backing. The derivatives business is a lucrative and concentrated one: 95% of the trading in derivatives in the US are done by the five biggest banks, Bank of America, Citigroup, Goldman Sachs, Morgan Stanley and JP Morgan. The banks have made more money in derivatives because they have government backing for deposits, Kelleher said. That’s no longer in place.

“The swaps pushout provision was saying US taxpayers should not be paying for risky trading activities,” said Kelleher.”

***

Read the full Guardian article here:

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