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From Securities Regulation Daily, December 11, 2014

Opposition mounts against swaps push-out amendment

By J. Preston Carter, J.D., LL.M. and Jim Hamilton, J.D., LL.M.

Sens. Elizabeth Warren (D-Mass), Sherrod Brown (D-Ohio), and David Vitter (R-Iowa), as well as Reps. Nancy Pelosi (D-Calif), Maxine Waters (D-Calif), Elijah E. Cummings (D-Md), and Federal Deposit Insurance Corporation Vice Chairman Hoenig have urged the House of Representatives to remove from the government funding bill a provision that would roll back Sec. 716 of the Dodd-Frank Act, which limits the ability of big banks to trade certain financial instruments known as swaps—contracts that allow the banks to hedge their risks or to speculate.

Background. The “swaps push-out rule” was a key component of the Dodd-Frank Act, requiring financial institutions to conduct speculation through swaps in separate affiliates from the FDIC-insured banks, using separate affiliate capital. House Republicans, in a summary of the funding bill, said the amendment would help the economy and “protect farmers and other commodity producers from having to put down excessive collateral to get a loan” or expand their businesses.

Voices to retain the swaps push-out rule. Warren said that the House is about to vote on a budget deal “ negotiated behind closed doors that slips in a provision that would let derivatives traders on Wall Street gamble with taxpayer money and get bailed out by the government when their risky bets threaten to blow up our financial system.”

Brown said, “This giveaway to Wall Street would open the door to future bailouts funded by American taxpayers. It’s been just six years since risky financial practices put our economy on the brink of collapse and cost millions of Americans lost jobs, homes, and retirement savings. This provision, originally written by lobbyists, has no place in a must-pass spending bill.”

Vitter and Brown sent a letter to Congressional leadership stating that the problem of “too big to fail” is far from over and that removing taxpayer subsidies for risky derivative trades that are unnecessary for normal banking purposes is an important step. “If Wall Street banks want to gamble, Congress should force them to pay for their losses, and not put the taxpayers on the hook for another bailout.”

Pelosi said the provision, “allowing big banks to gamble with money insured by the FDIC, opens the door to another taxpayer-funded bailout of big banks—forcing middle class families to bear the burden of Wall Street’s mistakes.”

Waters noted, “I am disgusted that in a back room deal, some members and lobbyists for the largest banks are trying to undo a seminal component of the Wall Street Reform Act by reversing a provision that prohibits banks from using taxpayer-insured funds to engage in derivatives trading activity. This legislation, which according to the New York Times was primarily authored by lobbyists at Citigroup, would be a huge gift for Wall Street’s largest banks.” She added, “I’m disheartened that, by trying to pass this repeal, this Congress is risking our homes, jobs and retirement savings once again.”

Cummings added, “Bank profits were higher last year than in any year in history—exceeding all-time records set before the financial crisis in 2008—yet millions of hard-working Americans have seen their wages stagnate as corporate executives get rich. The banks that brought our financial system to the brink of collapse do not need this bailout provision, and they should not be allowed to gamble with taxpayer money.”

FDIC Vice Chairman Hoenig noted, “Section 716 of Dodd-Frank is an important step in pushing the trading activity out to where it should be conducted: in the open market, outside of taxpayer-backed commercial banks. It is illogical to repeal the 716 push out requirement. In fact, under 716, most derivatives—almost 95%—would not be pushed out of the bank.”

Dennis Kelleher, President and CEO of Better Markets, called the amendment an “early Christmas gift for Wall Street’s biggest banks.” Kelleher said the provision is specifically designed to protect taxpayers and prevent bailouts. “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,” he added.

Industry urges retaining the rule. Lisa Donner, executive director of Americans for Financial Reform, said, “The section of Dodd-Frank that Congress is proposing to repeal was put in place to help prevent future bailouts of too big to fail banks. It cordons off the kinds of extraordinarily risky transactions that were at the heart of the financial crisis. Including this repeal in the budget is outrageous. It’s a giveaway to a tiny handful of the biggest Wall Street banks that puts the country’s financial and economic stability at risk.”

Public Citizen stated that the measure will “permit banks to continue gambling in the derivatives market under the banner of taxpayer-insured Federal Deposit Insurance Corporation (FDIC) banks.”

U.S. PIRG said it was “condemning this backdoor, backroom budgetary effort to repeal the Wall Street reform law's protections for taxpayers and Main Street from the riskiest derivatives swaps that led directly to the 2008 financial collapse, a taxpayer bailout for banks and a recession for everyone else.”

Speaking to amend the swaps push-out rule. Speaking in favor of the amendment, House Speaker John Boehner (R-Ohio) said the provision addresses the valid criticisms of Section 716 without weakening the financial reform law's important derivative safeguards or prohibitions on bank proprietary trading.

Also, the American Bankers Association stated that the majority of banks use swaps to hedge or mitigate risk from their ordinary business activities, including lending. “The push-out requirement to move some swaps into separate affiliates makes one-stop shopping impossible for businesses ranging from family farms to energy companies that want to hedge against commodity price changes.”

Administration Statement of Policy. While the Obama Administration supports House passage of H.R. 83, it objects to the inclusion of what the White House calls “ideological and special interest rider” in the House bill. In a Statement of Policy the Administration particularly objected to a rider amending the swaps push-out provisions of Section 716 of the Dodd-Frank Act. The White House said that the swaps push out rider would weaken a critical component of financial system reform aimed at reducing taxpayer risk.

Companies: American Bankers Association; Americans for Financial Freedom; Better Markets; Our Financial Security; Public Citizen; U.S. PIRG

MainStory: TopStory Derivatives

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