Buried language in Blanche Lincoln's banking legislation preserves potential for future bailouts.

[seafan]

Andrew Cockburn points out this shrouded loophole in Blanche Lincoln's legislation that would require banks to divest themselves of derivative trading:

If only for a moment, things look a little sour for Wall Street. Amid the SEC’s indictment of Goldman-Sachs and consequent reminder to the citizenry of the crookedness rampant in the financial “services” industry, a hitherto loyal ally, Senate Agriculture Committee chair Blanche Lincoln, has proposed legislation requiring major banks to divest themselves of their their vitally lucrative derivatives trading desks. Only at the very end of the senate Democrats’ enormous 1408 page financial reform is there a hefty chunk of solace for the bankers, in the form of Section 1155, a generally unnoticed provision clearly mandating another taxpayer-funded bailout all round the very next time disaster strikes.

.....

True, Senator Chris Dodd’s “Restoring America’s Financial Stability” bill makes popular noises about forcing derivatives trading into clearing houses and onto exchanges, but the big dealers were not unduly worried. After all, they already controlled major clearing houses, such as ICE, the Intercontinental Exchange, and anything too unwholesome in Dodd’s banking committee bill could be purged in a companion bill emanating from the Agriculture committee.

.....

Separating banking from “prop trading” is essentially what Paul Volcker proposed some months ago. Although unveiled in one of those recurring moments when Obama wants to appear tough on Wall Street, the idea has barely been heard of since. Now Lincoln has offered a means of implementing the “Volcker Rule” and Geithner, the bankers’ friend, is reportedly not pleased. (Gensler is a different matter. Of all the senior administration financial officials, he is the least respectful of and subservient to Wall Street, doubtless thanks to insights gained during his erstwhile career at Goldman Sachs.)

Sad to say, the proposal is far too sensible and necessary for the health of the financial system to be allowed to stand, and will doubtless disappear in some administration-brokered compromise in pursuit of republican votes. The Dodd bill has already shorn the proposed Consumer Finance Protection Agency of any putative independence, consigning it to the black hole of the Federal Reserve.

More recently, there are reports that the bill will be stripped of a provision requiring a levy on the “too big to fail” banks as an insurance fund in the event of possible future defaults. However, anyone who believes official trumpetings about ending mega-bank bailouts should take a look at the paragraph on page 1379:

“During times of severe economic distress,” it reads, the Federal Deposit Insurance Corporation “shall create a widely available program to guarantee obligations of solvent insured depository institutions or solvent depository institution holding companies (including any affiliates thereof)...”

In plain English, this means that the next time they bring the system to ruin, the banks and bank holding companies will get bailed out by the taxpayers, just like this time. However disgruntled they may feel, the banks are not undone just yet.

Too big to fail. Too big to nail. Too big to jail.



And, sadly, the beat goes on.

[MidwestTransplant]

1. I don't think that has to do with too big to fail. It's saying the gov't will stand behind FDIC

insured deposits which it does anyway.

[pnwmom]

2. Notice that the critical provision contains the word "solvent."

“During times of severe economic distress,” it reads, the Federal Deposit Insurance Corporation “shall create a widely available program to guarantee obligations of solvent insured depository institutions or solvent depository institution holding companies (including any affiliates thereof)...”


My reading of this is that it is a measure to avoid panic and bank runs on a SOLVENT bank (which could ruin even a solvent bank). It wouldn't help banks that are failing or failed.