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News : International Last Updated: Apr 15, 2010 - 7:55:12 AM


US Financial Reform: Wall Street lobbies against derivatives-trading reform with help from Republicans
By Michael Hennigan, Founder and Editor of Finfacts
Apr 14, 2010 - 5:28:37 AM

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Sign on Washington DC's K Street - - home of slippery lobbyists and the epicenter of American corruption, where vast opportunities for legal corruption exist in a system, where bribery has been almost defined out of existence.

Kevin Phillips wrote in Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism, of the "revolving door" in America's capital: "The English-speaking peoples, when filling in new lands, had a certain naiveté about the power of entrenched interests and how these could be subdued by locating a political capital in a remote federal preserve far from the existing centers of (corrupting) urbanity and wealth. The capitals were thus located in backwaters at a time when geography trumped media (Washington, D.C., Ottawa, and Canberra); but today, those names have become shorthand in their respective electorates for (1) metropolitan areas with strikingly high (and recession-resistant) per capita incomes; and (2) hothouses of seething interest-group concentration where elected representatives, shedding whatever grassroots fealty they may once have possessed, often train to retire after ten or twelve years to triple or even quintuple their salaries by becoming lobbyists." Photo: dcra.dc.gov

The drive for US financial reform is hitting high gear and Wall Street's biggest firms are lobbying hard against reform of derivatives-trading with help from Republicans.

The Wall Street Journal reports that Senate Democrats, resisting a last-ditch lobbying push from big Wall Street firms, are moving toward a sweeping revamp of financial regulation that would squeeze banks' lucrative derivatives-trading business.

Wall Street giants Goldman Sachs, JPMorgan Chase and Morgan Stanley had been pressing hard in recent days to dilute provisions of the bill that would change the rules for derivatives trading. But the Obama administration, which has made this one of its priorities for the financial-regulatory bill, has pushed back hard and appears to be succeeding. That's drawing Republican complaints that the pending rewrite of the rules of finance will put the economy at risk.

The Journal says the bankers' lobbying has focused on the Senate Agriculture Committee, which Wall Street hoped would produce a friendlier bill than an alternative from the Senate Banking Committee. But it became clear Tuesday that the Agriculture Committee's chairman, Arkansas Democrat Blanche Lincoln, is now expected to introduce a bill with provisions that bankers oppose and the White House supports.

Trading in derivatives is the preserve of five Wall Street banking giants - - JP Morgan, Goldman, Morgan Stanley, Bank of America and Citigroup Inc. The business produced revenues of about $20bn last year, according to Comptroller of the Currency and industry estimates.

Derivatives are so named as they are instruments that derive value from some other product or instrument such as the changes in prices of commodities such as oil or wheat, movement in interest rates or insurance on debt. The latter are termed credit default swaps.

In the unregulated market, the fallout from a feared collapse of insurer AIG during the crisis was that the no one knew how big the derivatives market was and the extent of the counterparties of the insurers' instruments in the market.

It is proposed that trades should be done through an exchange or clearing house but the big players fear transparency.

Finfacts articles:

Jan 2010: Credit Default Swaps: Heading towards a more stable system

Mar 2010: Greek crisis and why getting tough on CDSs - - credit default swaps - - does more harm than good

In a Senate speech on Tuesday, Senate Minority Leader Mitch McConnell led the Republican counterattack against reforms proposed in a bill sponsored by Senator Chris Dodd: "We must not pass the financial reform bill that's about to hit the floor."

Adam Sorensen in Time Magazine says that the crux of McConnell's criticism is that the bill "institutionalizes... taxpayer-funded bailouts of Wall Street banks." He knocked the expansion of power at the Fed and Treasury, while sounding the alarm on Wall Street accountability.  Sorensen says if the outline of his speech sounds familiar, it's because it is the exact argument pollster Frank Luntz urged Republicans to make earlier this year in a widely publicized memo.

The Republican Party consultant and pollster had been hired by RTÉ, the Irish State broadcaster in 2007 before the general election, to handle televised focus groups.

Adam Sorensen writes: Compare the excerpts below (emphasis mine):

Luntz: "The single best way to kill any legislation is to link it to the Big Bank Bailout."

McConnell: "We cannot allow endless taxpayer-funded bailouts for big Wall Street banks. And that's why we must not pass the financial reform bill that's about to hit the floor."

Luntz:"Taxpayers should not be held responsible for the failure of big business any longer.  If a business is going to fail, not matter how big, let it fail."

McConnell: "[The Dodd bill] gives the government a new backdoor mechanism for propping up failing or failed institutions.... We won't solve this problem until the biggest banks are allowed to fail."

Luntz: "Government policies caused the bubble and its ultimate crash. Fannie Mae, Freddie Mac, the Federal Reserve, and the Community Reinvestment Act all had a role in the catastrophe. The government inflated economic bubbles with easy credit policies."

McConnell: “It also directs the Fed to oversee 35 to 50 of the biggest firms, replicating on an even larger scale the same distortions that plagued the housing market and helped trigger a massive bubble we'll be suffering from for years. If you thought Fannie and Freddie were dangerous, how about 35 to 50 of them?"

Senator Lamar Alexander, a member of the Senate Republican leadership and a big recipient of Wall Street campaign contributions, blasted Dodd for partisanship: "Dodd jerked the rug out from under Sen. Corker and went back into a partisan bill" -- that is, partisanship toward Wall Street. Alexander said Republicans will hold out for a plan "that would end the practice of too big to fail and that would make certain that we don't perpetually use taxpayer dollars to bail out Wall Street."

Senator McConnell and Senator John Cornyn of Texas, the chairman of the National Republican Senatorial Committee, are reported to have met with hedge fund managers last week in New York.

“If a major institution manages itself to the edge of the abyss,”US Treasury secretary Tim Geithner said at a meeting of the American Society of Newspaper Editors, “we’re able to put them out of their misery, put them through an effective bankruptcy regime, dismember them safely without taxpayers being exposed to a penny of risk of loss.”

Geithner said he believed the bill would be approved. “I’m very confident we’re going to have Congress act on a strong sweeping set of reforms,” he said.

However, Senator Richard C. Shelby of Alabama, the senior Republican on the banking committee, said the legislation would fail in its current form.

“I don’t know of any Republicans right now that would support it,” he said.

The New York Times reports today that from anonymous midlevel workers to former House and Senate majority leaders, more than 125 former Congressional aides and lawmakers are now working for financial firms as part of a multibillion-dollar effort to shape, and often scale back, federal regulatory power, data shows.

An analysis by the think-tank, Public Citizen, found that at least 70 former members of Congress were lobbying for Wall Street and the financial services sector last year, including two former Senate majority leaders (Trent Lott and Bob Dole), two former House majority leaders (Richard A. Gephardt and Dick Armey) and a former House speaker (J. Dennis Hastert).

"You've got all these industries protecting their turf,"said Lawrence Baxter, a law professor at Duke University whose research focuses on regulation of financial services. Baxter previously held senior positions at financial firm Wachovia Corp."It's amazing how some industries can stay in the game when common sense says they clearly need to be regulated. But then you look at their campaign contributions and you understand why. Campaign contributions are very effective at slowing down reforms that need to be done from a public interest perspective."

Discussing when will be the next financial meltdown and who will be responsible, with William Isaac, former FDIC chairman and Simon Johnson, MIT Sloan School of Mgmt:

The Center for Responsive Politics says the finance, insurance and real estate sector has given $2.3bn to candidates, leadership PACs (political action committee) and party committees since 1989, which eclipses every other sector. Nineteen percent of total contributions from the employees and political action committees across all sectors came from the financial sector.

The CRP says the financial sector has also been a voracious lobbying force, spending an unprecedented $3.8bn since 1998, while sending an army of lobbyists to Capitol Hill to make its case. That's more money than any other sector has spent on influence peddling. Not even the health care sector, which spun up a lobbying frenzy this year over health reform, has spent more.

Contribution list of individual Members of Congress

In all, federal lobbyists’ clients spent more than $3.47bn last year, often driven to Washington, D.C.’s power centers and halls of influence by political issues central to the age: health care reform, financial reform, energy policy.

That figure represents a more than 5 percent increase over $3.3bn worth of federal lobbying recorded in 2008, the previous all-time annual high for lobbying expenditures. And it comes in a year when a recession persisted, the dollar’s value against major foreign currencies declined and joblessness rates increased.

The number of registered lobbyists in Washington DC, has grown 31% since 1998, to 13,600 while spending on lobbyists has grown by 140%.

CNBC's Hampton Pearson has the details on hedge funds trying to buy off political parties to stop a White House attack on their investments:

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