House Ag committee Dems vote to deregulate derivatives

(Updated)House Ag committee Dems vote to deregulate derivatives

(Updated) House Ag committee Dems vote to deregulate derivatives

3/21/2013 10:00am by Gaius Publius 28 Comments

UPDATE: The Dems voting with the bank and against the taxpayers on HR 992 (described below) are:

Pete Gallego (TX-23)

Ann Kuster (NH-2)

Sean Patrick Maloney (NY-18)

Mike McIntyre (NC-07)

David Scott (GA-13)

Juan Vargas (CA-51)

Of these, the surprise is NH frosh Ann Kuster. Watch her closely. And in case you’re interested, that number again is 202-225-5206.

UPDATE 2: You’ll notice that the whole vote, as reported, was 31-14. The six Dems could have voted No and the motion would still have passed. This means, their votes weren’t needed. Speaking for myself alone, I can only see this as a request for campaign funds from bank lobbyists on the part of these Dems. Even if this is a sincerely held position (putting taxpayers on the hook for bank casino losses), this public declaration as a very bank-friendly act.

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This is a major under-the-radar story. The House Agriculture Committee, including its Democrats, voted just this week to gut the Dodd-Frank regulation of derivatives by approving a series seven bills. Of the seven, six are strongly opposed by public-interest regulation watchdogs. All seven bills now go to the House floor for a vote there.

This is a bad-Dems story, and also a derivatives story.  I’m coming to it slowly, so we’ll do the broad strokes below, and the details in a follow-up.

Background — Derivatives risk and the “London Whale”

Chris wrote about the London “Whale” here, a commodity trader at Jamie Dimon’s JPMorgan Chase, who helped rack up, along with the rest of his group, a reported $2 billion in trading losses late last year (but see below for a more recent number) — all by aggressively trading the derivatives market in credit default swaps (CDSs).

Credit default swaps are pure casino bets. They were originally designed as a form of insurance against bond and other credit defaults (“I’ll pay you a monthly fee and you pay me my losses if these bonds default.”)

It’s a simple concept, but CDSs soon evolved. Turns out you don’t have to actually hold the bonds to insure them. This means that one guy can sit at a table with a bunch of bonds (or bundles of mortgages), while another guy can insure them. Meanwhile, at 50 other tables, 50 more guys can buy the same “insurance” on the same bonds from anyone who will sell it to them. Keep in mind, only the first guy actually holds the bonds. The other guys just know they exist.

That’s 50 side-bets on one set of bonds. Placing side-bets on someone else’s property is like betting on a ball game you’re just watching. Like I said, pure casino money.

Do you see the problem? One guy’s bonds default and suddenly 51 guys in that room, everyone who sold “insurance,” they’re all wiped out. Why? Because the dirty secret of derivatives bets is that the people offering the “insurance” rarely have the money. They’re betting that they can collect “insurance” fees forever and the defaults will never come. That’s what happened with mortgage-backed bets in 2007, and that’s what’s happening today.

And thanks to the U.S. government’s bailout of Wall Street mortgage-derivatives (many of which were, yep, CDSs), these “insurers” know they’ll never need the money — Uncle Sam will pay those bets for them, with yourmoney.

Let’s say that simply. Banks are placing billions of dollars in casino bets per day with Uncle Sam’s money, and you’re on the hook for the losses. Sweet deal, right? But this isn’t just theory.

The London Whale matters because he’s not oh-so-2007, he’s oh-so–last December. Jamie Dimon and JP Morgan Chase (corporations are just force-extenders for greedy humans, remember) are at it today, and thanks to a Congressional investigation report released just last week, we know the extent of the problem and that Dimon’s been lying through his teeth about it.

Here’s just the opening of House member Carl Levin’s devastating investigative report (pdf; my emphasis):

JPMORGAN CHASE WHALE TRADES:

A CASE HISTORY OF DERIVATIVES RISKS AND ABUSES

March 15, 2013

JPMorgan Chase & Company is the largest financial holding company in the United States, with $2.4 trillion in assets. It is also the largest derivatives dealer in the world and the largest single participant in world credit derivatives markets. Its principal bank subsidiary, JPMorgan Chase Bank, is the largest U.S. bank. JPMorgan Chase has consistently portrayed itself as an expert in risk management with a “fortress balance sheet” that ensures taxpayers have nothing to fear from its banking activities, including its extensive dealing in derivatives. But in early 2012, the bank’s Chief Investment Office (CIO), which is charged with managing $350 billion in excess deposits, placed a massive bet on a complex set of synthetic credit derivatives that, in 2012, lost at least $6.2 billion.

The CIO’s losses were the result of the so-called “London Whale” trades executed by traders in its London office – trades so large in size that they roiled world credit markets. Initially dismissed by the bank’s chief executive as a “tempest in a teapot,” the trading losses quickly doubled and then tripled despite a relatively benign credit environment. The magnitude of the losses shocked the investing public and drew attention to the CIO which was found, in addition to its conservative investments, to be bankrolling high stakes, high risk credit derivative trades that were unknown to its regulators.

The JPMorgan Chase whale trades provide a startling and instructive case history of how synthetic credit derivatives have become a multi-billion dollar source of risk within the U.S. banking system. They also demonstrate how inadequate derivative valuation practices enabled traders to hide substantial losses for months at a time; lax hedging practices obscured whether derivatives were being used to offset risk or take risk; risk limit breaches were routinely disregarded; risk evaluation models were manipulated to downplay risk; inadequate regulatory oversight was too easily dodged or stonewalled; and derivative trading and financial results were misrepresented to investors, regulators, policymakers, and the taxpaying public who, when banks lose big, may be required to finance multi-million-dollar bailouts.

And that’s just the start of the report. It’s really thorough, and it made the news.

But that was last week in the House. This week in the House, Democrats on the Agriculture committee voted to blow massive holes in … derivatives regulation.

House Democrats vote to dismantle derivatives regulation and increase taxpayer backing for bank losses

Your Democratic party in action, serving their constituents — Money.

Remember when I said it’s only on rights issues — women’s rights, gay rights — that the Democrats were better than Republicans? That on economic issues, both parties represent the billionaire consensus (“All your money are belong to us“)?

This is how that works in the real world. From Zach Carter at the Huffington Post:

Corruption via Shutterstock

A House Committee approved six new bills [of seven total] to deregulate Wall Street derivatives on Wednesday, advancing legislation that would expand taxpayer support for derivatives and create broad new trading loopholes allowing banks to shirk risk management standards created by the 2010 Dodd-Frank bill.

The House Agriculture Committee passed all six bills with broad bipartisan support, just five days after Sen. Carl Levin (D-Mich.) released a report detailing extensive failures to contain derivatives risks at JPMorgan Chase — troubles that lead to billions of dollars in losses from a single trade.

The legislation will next be considered by the full House of Representatives.

The most controversial bill to advance Wednesday is explicitly designed to expand taxpayer backing for derivatives. It was the only legislation that lawmakers were required to cast individual votes for or against; the others were all approved by unanimous voice votes. The bill to increase taxpayer support for bank derivatives dealing was approved by a vote of 31 to 14.

The suite of seven bills is listed here. All passed. The good bill is HR 742. All the rest stink (pdf). My understanding is that all but one passed on a voice vote, with a roll call on H.R. 992, the Swaps Regulatory Improvement Act. That’s the one that Carter says passed 31 to 14.

This now goes to the House  floor. Stay tuned. If these bills pass and become law, the next banking meltdown just might precede full Arctic melt, rather than follow it.

Naming Democratic names

The government’s website hasn’t updated the vote in this committee, so I don’t have the breakdown for you. I’ll update this table when that happens. In the meantime, here are your 22 (correction: 21) Dems on this committee:

Last Name	First	District	Party	Phone Number	Agr. Cmte	Frosh?
Peterson (N)	Collin	MN-7	D	202-225-2165	2
Bustos (N)	Cheri	IL-17	D	202-225-5905	1	Y
Costa  (N)	Jim	CA-16	D	202-225-3341	1
Courtney (N)	Joe	CT-2	D	202-225-2076	1
DelBene (N)	Suzan	WA-01	D	202-225-6311	1	Y
Enyart (N)	William	IL-12	D	202-225-5661	1	Y
Fudge (Not voting)	Marcia	OH-11	D	202-225-7032	1
Gallego (Y)	Pete	TX-23	D	202-225-4511	1	Y
Garamendi (N)	John	CA-03	D	202-225-1880	1
Kuster (Y)	Ann	NH-2	D	202-225-5206	1	Y
Lujan Grisham (N)	Michelle	NM-1	D	202-225-6316	1	Y
Maloney (Y)	Sean	NY-18	D	202-225-5441	1	Y
McGovern (N)	Jim	MA-2	D	202-225-6101	1
McIntyre (Y)	Mike	NC-07	D	202-225-2731	1
Negrete McLeod (N)	Gloria	CA-35	D	202-225-6161	1	Y
Nolan (N)	Rick	MN-8	D	202-225-6211	1	Y
Schrader (N)	Kurt	OR-05	D	202-225-5711	1
Scott (Y)	David	GA-13	D	202-225-2939	1
Vargas (Y)	Juan	CA-51	D	202-225-8045	1	Y
Vela (N)	Filemon	TX-34	D	202- 225-9901	1	Y
Walz (N)	Tim	MN-1	D	202-225-2472	1

Seven (actually six) of these names voted the wrong way. I’m pretty sure the ranking member (Collin Peterson) was a No vote, since he spoke strongly against these bills, and Maloney and Scott are co-sponsors, so I assume they voted Yes. But I can only guess about the rest. When the vote is reported, I’ll bold the names of the other Yes’s as well. (Update: The vote record is indicated above; roll call here.)

These will be wall-of-shame names; feel free to tell them so.

Bottom line

This is more than a big deal. This legislation — bought and paid by bankers on Wall Street — could put us right back to 2006, just months before the crash cum bailout that brought you the current economic world. All so Jamie Dimon can burn money like paper and parade his ego through a world of his minions.

This shouldn’t stay under the radar. I’m going to report the minions here, and again when the full House votes. Until then, I’ll leave you with this, a single sentence from Congressman Alan Grayson:

“The road to hell is paved with these bills.”

So true. What you never hear about can kill you.

GP