The True Story of the Financial Deregulation Provision in the Cromnibus

By Carney, Timothy P. | Examiner (Washington, D.C.), The, December 16, 2014 | Go to article overview

The True Story of the Financial Deregulation Provision in the Cromnibus


Carney, Timothy P., Examiner (Washington, D.C.), The


You could certainly blame Citigroup for a regulation-gutting provision in the end-of-the-year spending bill. But you could also blame Barney Frank.

Here's the story behind the notorious financial deregulation that ended up in the so-called Cromnibus spending bill:

In 2010, Sen. Blanche Lincoln, D-Ark., facing a primary challenge, used her chairmanship of the Agriculture Committee to shore up her Left flank. Lincoln inserted into the Dodd-Frank financial regulation bill new rules on derivatives, including the "push-out" rule: Banks could hold derivatives, but they would need to hold them in special subsidiaries that didn't benefit from government backing in the form of FDIC insurance and access to the Federal Reserve's lending windows.

It's a sensible idea: Banks should be free to gamble with risky, opaque investments, but the average bank customer shouldn't have to pay to back it up. But it was a controversial idea at the time, even among Dodd-Frank supporters.

"Administration officials and key congressional Democrats have also indicated they are uncomfortable with Lincoln's derivatives language," Market News International reported at the time.

The worry: Derivatives can be risky, but banks also use them to limit risk on the loans they make. To give one example: A bank financing an oil-exploration project might purchase a derivative that goes up in value if oil prices fall.

Lincoln got her regulations, but soon after Dodd-Frank passed, members of both parties began working to kill or narrow the push- out provision. Megabank Citigroup helped, as the New York Times reported earlier this year: Citi lobbyists actually wrote the text of the measure.

The House Financial Services Committee, in February 2012, passed the Citigroup-crafted bill, titled the "Swaps Regulatory Improvement Act" and co-sponsored by Reps. Randy Hultgren, R-Ill., and Jim Himes, D-Conn. Congressional filings show many entities lobbied on the bill, including the Chamber of Commerce, the American Bankers Association, the Securities Industry and Financial Markets Association, Bank of America, Citigroup, General Electric, JPMorgan, the International Swaps and Derivatives Association, plus energy companies and mid-sized banks among others.

Barney Frank, then the ranking Democrat on Financial Services, supported the Hultgren-Himes measure. "I never myself thought it made a great deal of sense," Frank said of Lincoln's rule. "It added nothing in terms of protection."

A couple of months after Financial Services passed the measure, though, JPMorgan suffered a multi-billion-dollar loss through bad and opaque bets on derivatives that were supposedly just hedges and risk mitigation, but were in fact speculative bets by the megabank-- "hedge-ulation" as they call it.

JPMorgan's so-called "London Whale" loss derailed the push-out fix until after the 2012 elections. …

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