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Gary Cameron / Reuters

How the budget deal would deregulate Wall Street

The Congressional Omnibus package winding through the Senate would kill a provision of Dodd-Frank financial reform

The Senate will likely soon approve a $1.1 trillion spending bill, following Thursday's House vote. But don't expect the omnibus package to get through without a fight. Some progressives in the Senate, led by Elizabeth Warren, D-Mass., are livid at a part of the bill that they say would encourage Wall Street to engage in risky behavior.

That clause would repeal part of the 2010 Dodd-Frank financial reform package dealing with complex derivatives. Warren denounced the provision in a speech on the Senate floor on Thursday, saying it "was slipped in at the last minute to benefit Wall Street."

"It was written by lobbyists for Citigroup,” Warren said. “That provision means big money for a few big banks. It would let derivatives traders on Wall Street gamble with taxpayer money — and, when it all blows up, require the government to bail them out."

The spending bill would repeal the Dodd-Frank "push-out" rule, which prevents banks from holding certain kinds of derivatives in subsidiaries backed by the Federal Deposit Insurance Corporation (FDIC). Deposits in FDIC-backed accounts are guaranteed up to a certain amount by the federal government.

The derivatives currently banned from FDIC-backed accounts include some of the riskiest financial instruments, such as uncleared credit default swaps, in which there is no exchange market or other intermediary between traders to diffuse risk.

A credit default swap is a type of derivative that an investor can purchase from a bank as a form of insurance against the possibility that one of its investments will go bad. Banks may have amplified the 2008 financial crisis by speculating in credit default swaps that later turned out to be worthless.

Dodd-Frank pushes uncleared credit default swaps, and other instruments, out of FDIC-backed accounts. Proponents of this “push-out” say it ensures that the FDIC isn't responsible for covering losses from risky bank behavior. "Swaps push-out was meant to ensure that some of the riskiest derivatives were kept outside of the FDIC-insured part of the bank,” says Alexis Goldstein, communications director for The Other 98 Percent, a left-leaning financial reform advocacy group. That's especially important, Goldstein says, because the FDIC must use its finite resources to guarantee consumer bank accounts.

Additionally, Goldstein said, allowing exotic instruments into FDIC-backed accounts would provide banks with an "implicit subsidy." In other words, FDIC backing for credit default swaps lowers the perceived risk associated with trading them, making it easier for banks to do so at a lower cost.

Wall Street has lobbied Congress aggressively to remove the push-out rule. JPMorgan Chase Chairman Jamie Dimon reportedly called various legislators to persuade them to vote for repeal of the provision.

The American Bankers Association (ABA) supports repeal of the rule, arguing that swaps allow banks to diffuse the risk of various business transactions. "Hedging and mitigating risk are not only good business practices, but are important tools that banks use to help borrowing customers hedge their own business risks,” said ABA executive vice president James Ballentine in a Wednesday statement.

Although the White House has voiced concerns over the push-out repeal, it has also thrown its support behind the omnibus legislation and urged a yes vote.

 

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