"Lure People Into That Calm and Then Just Totally F--k 'Em": How All of Us Pay for the Derivatives Market
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But the overarching lesson is clear: you cannot end too-big-to-fail without divorcing taxpayer subsidies for derivatives from the banking industry. Insane profitability carries with it extreme political power. Every other aspect of Wall Street reform hinges on the willingness of Congress to defuse derivatives profits. So long as megabanks can rake it in on derivatives, it will be extremely difficult to rein in other aspects of their business, regardless of what rules are actually on the books.
Fortunately, the political winds are shifting. Kansas City Federal Reserve President Thomas Hoenig offered strong support for the plan to end derivatives subsidies in a June 10 letter to Sen. Blanche Lincoln. Lincoln herself decided to run with the derivatives crackdown when she realized that her primary challenger Bill Halter had both the funding and the support from progressives to unseat her. While Obama remains opposed to the Lincoln proposal, Lincoln's sudden ferocity on derivatives was championed by both Obama and former President Bill Clinton as reasons for her relevance in the November elections, and this support led Lincoln to a narrow victory in the Democratic primary last week. After watching so-called "moderate" Democrats spend a full year watering down reforms to please their Wall Street backers, at least one Blue Dog finally realized that Americans want real reform, and that real political gain could be realized by providing it.
Organized labor, major boosters of financial reform, poured $10 million into Halter's campaign against Lincoln. Even though Halter didn't win, the return on this investment is beginning to look very strong. J.P. Morgan Chase CEO Jamie Dimon expects the current derivatives language to cost his company $2 billion a year in profits. Multiply that figure by the number of major dealer-banks, and it comes to $10 billion a year. Over the course of a decade, $100 billion in Wall Street profits will remain in the real economy instead of being distributed as dividends and bonuses. Scoring $100 billion for the economy on a $10 million investment is a return of 1,000,000 percent -- easily the greatest single trade in history.
Our megabanks have used derivatives dealing and proprietary trading to secure big profits and big bonuses in the years since the major financial collapse of 2008. Without the profits from these risky businesses, there is no question that many of the largest U.S. banks would be utterly bankrupt today. Critics of Section 716 say this is reason alone not to support the provision. But think about that -- our largest banking institutions are only making money by running speculative casinos (derivatives dealing) and gambling themselves (prop trading). These activities do not support broader economic growth; that's why the banking sector can be doing so well while the unemployment rate is hovering around 10 percent. Multi-trillion-dollar obscenities don't do anything to improve the effective or efficient functioning of the economy, especially when they're converting that economy into the Las Vegas strip. Speculation can't fuel a financial sector indefinitely-- we can't allow banks to drive themselves off a cliff with speculative operations, bail them out, and then let them go back to speculating like maniacs as if nothing had happened.
Forcing banks out of the derivatives business is by no means a done deal. Only continued public pressure can keep politicians from selling out to Wall Street (again).
Zach Carter is an economics editor at AlterNet. He writes a weekly blog on the economy for the Media Consortium and his work has appeared in the Nation, Mother Jones, the American Prospect and Salon.