Wall Street Lobbyists Could Severely Weaken Derivative Regulation

Wall Street Lobbyists Could Severely Weaken Derivative Regulation

Wall Street lobbyists are trying hard to weaken the extent to which the government can police a practice that played a central role in the 2008 financial crisis.

Some of the country's largest banks -- including Morgan Stanley, Goldman Sachs, JPMorgan Chase, Citigroup and Bank of America -- are lobbying Congress to grant regulatory exceptions for derivatives traded outside the U.S. Each of these banks has at least half its assets in overseas operations, according to Bloomberg, meaning that hundreds of millions of dollars' worth of trading could lie outside the scope of the Dodd-Frank financial reform bill if the lobbyists are successful.

In the years leading up to the financial crisis, the derivatives market was where Wall Street firms shifted their risk around in increasingly complex ways, until nearly everyone with skin in the financial game, from major corporations to ordinary homeowners, was somehow implicated in one deal or another. Derivatives trading has been a source of major profit for Wall Street -- JPMorgan Chase reportedly took in $5 billion in 2009, during an otherwise awful year, thanks to its derivatives desk -- but it's also a large part of what sent the national economy into a tailspin just a few years ago.

Analysts have voiced concern that the latest lobbying efforts, -- which would place much of the derivatives market outside the jurisdiction of Dodd-Frank -- could put the financial system at risk for another catastrophe. Yet it's hardly the first time that Wall Street lobbyists have attempted to blunt the effects of Dodd-Frank and other measures meant to curtail risky banking activity.

Commercial banks spent $61 million on political lobbying in 2011, according to the Center for Responsive Politics -- the sixth year in a row that lobbying spending increased in that sector. The securities and investment industry spent another $97 million on lobbying that same year. Much of this spending reflects attempts to influence the way Dodd-Frank is being put into practice, although financial firms also lobbied vigorously to change Dodd-Frank in 2010, when the law was still being written.

Such efforts haven't been in vain. Thanks to lobbyists, the latest draft of the Volcker rule -- a key piece of financial reform legislation that would prevent banks from making high-risk trades with their own money -- has grown from its original 10-page version to a document nearly 30 times as long, which may severely damage its chances of getting passed. (Such activity, known as proprietary trading, has been a reliable source of profit for banks, and the subject of both intense regulatory attention and protective industry lobbying.) Bank lobbyists have also succeeded in getting the Commodity Futures Trading Commission, a major regulator, to repeatedly delay a critical package of derivatives regulations.

And in June, the Federal Reserve gave banks a victory when it set a 24-cent maximum on the fee banks can charge retail merchants for debit-card transactions, which was much higher than what retailers had hoped for. Retailers sued the Fed later that year over the fee.

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