The Battle Against Letting Wall Street Continue to Make a Killing on Derivatives

Early in the morning, outside the House Financial Services Committee hearing room in the Rayburn office building last week, there were scruffy ex-homeless and other low-income folks, wearing their dreadlocks or sloppy jeans, mixed in with the pinstriped reps for the financial industry.

They all seemed to be lining up to see what $223 million in financial lobbying in the first six months of this year could buy in thwarting real reform on Capitol Hill. And they were hoping to get the few dozen of the public seats available inside the room, for a critical 10 a.m. hearing marking up a bill that was supposed to regulate the now-private market in complex "derivatives."

Those derivatives are nominally worth at least $450 trillion worldwide, with $555 billion in credit at risk in the U.S. banking industry. (Derivatives are forms of insurance or bets on underlying assets, such as now-toxic subprime mortgages, supposedly designed to manage risk.) No wonder Warren Buffett called them "financial weapons of mass destruction."

The derivatives bill is a cornerstone of the Obama administration's already-weakened reform plans that include a Consumer Financial Protection Agency facing a final vote this week.

On the Sunday talk shows, administration officials blasted Wall Street executives for paying big bonuses. But their rhetoric on pay hasn't been matched by a unified, strong effort to rein in unregulated derivatives trading, Hill sources say, such as the toxic "credit default swaps" AIG used to help sink the economy.

And with $15 billion in profits from derivatives trading in the first half of 2009, according to Treasury Department figures, it's still a major source of huge bonuses for investment bankers.

But instead, the administration has put its shrinking political capital behind saving the CFPA this week from the assaults of Republicans, the Chamber of Commerce and community bankers who claim, as usual, that it means job-killing over-regulation.

And it seems to have paid off: A sweeping amendment proposed by centrist Democrat Rep. Melissa Bean, D-Ill., to preempt tougher state enforcement seems, surprisingly, likely to fail.

Yet the administration's purportedly high-priority agency legislation is already much weaker on protecting consumers from fraudulent or confusing loans than originally proposed. In addition, nothing in the current slate of embattled reform measures under consideration directly address either the foreclosure crisis or the ongoing credit shortages that are still costing jobs and homes. Their goal, in theory, is just to prevent future abuses.

And by the time the derivatives bill was finalized last Thursday, that legislation also bore little resemblance to the original White House proposal in June to regulate most derivatives on public exchanges designed to create transparency .

"The whole bill essentially has so many loopholes for every rule, it not only puts us back where we were in August 2008, but the banks have eliminated what little [derivatives] regulation existed, so we'll arguably be in worse shape than before Lehman Bros. failed," says Michael Greenberger, the former director of trading and marketing for the Commodity Futures Trading Commission and a University of Maryland law professor.

So what the hell happened to the White House's apparently good intentions to regulate derivatives, and what does it all say about the likely fate of financial reform after the worst economic crisis since the Great Depression?

And what about those poor people turning out to see the mark-up: Were they a nascent sign of a growing populist revolt against banking CEOs who took $17.5 trillion in federal bailouts, loans and guarantees with no strings attached after wrecking the world economy?