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Is Barney Frank Joining the Wall Street Sell-Out?

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The Wall Street reform package is in it's final innings. Everything important about the bill that is left to decide will be decided today. It's not clear what's happening behind the scenes, but in public, the House has made a serious push to gut the entire reform process. Whether the Senate and a handful of strong reform advocates in the House can stand firm is currently an open question.

There are only two serious fights left: derivatives and the Volcker Rule. Derivatives are the main game-- it's the dominant profit-center for most banks, the source of the major abuses and insane risk-taking leading up to the financial crisis, and the reason the government stepped in to bailout AIG and every big bank in the nation. If we don't fix derivatives, the reform process is meaningless.

On nearly every single aspect of derivatives reform, the House is making an all-out push to carve out loopholes so big that legislation becomes an empty gesture. They're trying to exempt whole classes of derivatives from regulation, various financial institutions from derivatives regulations, and trying to change definitions to allow absurd activity to continue taking place in the dark. One of the key reforms is to require that derivatives be traded on an open exchange, just like ordinary stocks, but the House actually wants to define an "exchange" as a "voice brokerage facility." A "voice brokerage facility" is also known as a "telephone," and as every telephone user knows, those conversations are not public and transparent. This plan would allow companies to conduct trades in secret, off their balance sheets, without market or regulatory scrutiny-- exactly as they do now. The House is also trying to prevent financial giants from backing up their derivatives bets with capital-- letting them play fast and loose in the capital markets casinos without establishing a serious cushion for losses. Ryan Grim has a great run-down of the individual sell-outs here.

The one area the House has basically left alone is a plan from Sen. Blanche Lincoln, D-Ark., to force banks to spin-off their derivatives dealing operations into independently capitalized subsidiaries. The reformist pressure around this particular provision-- and Lincoln's electoral prospects-- appear to have kept the House from eliminating this very important reform.

Sadly, the Lincoln language means an awful lot less without the other reforms. If the Senate caves to the House push, Wall Street will be able to continue wreaking havoc on our economy with derivatives by trading in secret. You can't regulate secret trades.

There is also deep trouble brewing on the Volcker Rule. Rumor on Capitol Hill is that Sen. Scott Brown, R-Mass., has secured a loophole that would totally undercut the Volcker Rule by allowing banks to invest up to 2 percent of their capital in hedge funds. The 2 percent figure is wildly misleading, as when hedge fund bets go bad, they do so spectacularly. Bear Stearns put $40 million into a hedge fund during the heyday of the housing bubble, and had to pony up $3.2 billion when that investment backfired in 2007-- literally 80 times what they put into it. Had that 40 million been 2 percent of capital, Bear would have been well beyond bankrupt. The point of the Volcker Rule is to prevent banks from gambling with taxpayer money. Scott Brown wants banks to be able to gamble, so long as they house their bets in a hedge fund. It's a very bad idea, and he's doing it specifically to benefit State Street, a Boston-based bank that needed a massive bailout in 2008 after it destroyed itself by-- you guessed it -- gambling with taxpayer money.

So all eyes are on the Senate counter-offer and Barney Frank right now. If the Senate doesn't push back hard against the House plan, Frank will have backed a package that gutted the bill, and in doing so, committed the most egregious failure of leadership in any political party on financial policy since the Clinton-era. The Senate can be expected to push back, and Frank still has time to redeem himself, but it's running out.

House leaders are whimpering that they do not have the votes to pass a bill that actually fixes the reform. But as David Dayen noted this morning, the margin of safety is very wide on the December House passage, even with several reliable "yes" votes not actually showing up. Four easy "yes" votes didn't show-- Reps. Louise Slaughter, D-N.Y., Jim Moran, D-Va., Tammy Baldwin, D-Wis., and Jim Oberstar, D-Minn., while two members voted "no" because the reform was too weak, votes which would flip with strong derivatives language-- Reps. Marcy Kaptur, D-Ohio, and Bart Stupak, D-Mich. (Stupak made himself famous for his unproductive health care reform craziness, but he has been consistently excellent on financial issues, particularly derivatives). The bottom line: House leaders can secure a good bill if they want to. It's just a question of whether or not they want to.

Call Barney Frank and Chris Dodd now and tell them you will not accept Wall Street reform in name only.

Frank: 202-225-4247

Dodd: 202-224-7391