Blanche Lincoln

Don't Let Goldman Sachs Off The Hook

Zach Carter — Wed, 07 Jul 2010 13:53:44 -0400

When the nation's most prestigious investment banks found themselves on the verge of total annihilation in the fall of 2008, the most radical and effective government response was not the infamous $700 billion Troubled Asset Relief Program. The wildest salvation scheme for Goldman Sachs, Morgan Stanley and the securities system at large was a plan from the Federal Reserve to give these speculative institutions access to cheap loans from the central bank. It worked. With access to unlimited cheap funding from the Fed, the Wall Street titans survived. Hurrah.

Here's the catch. Cheap Fed funding is a subsidy during good times, and a bailout during bad times. These subsidies are supposed to spur productive activity. We want Fed money to be fueling business and consumer lending—we don't want it to be encouraging gambling in the securities and derivatives casinos. Those businesses are risky, they create big horrible asset bubbles and then put taxpayers on the hook for losses when the Fed backs them. That's why securities houses like Goldman and Morgan were never, ever granted Fed funding until the fall of 2008.

And Goldman has leveraged that Fed funding for all it's worth. Goldman had to create a commercial bank unit in order to borrow from the Fed, and Goldman chose to house its riskiest businesses in that unit in order to make sure that they would benefit from both cheap Fed funding and the better credit ratings that funding creates. Goldman has about $40 trillion in derivatives operations functioning under its commercial bank unit, which does nothing else but accept money from the Fed. The Fed is funding Goldman's casino, and the economy is getting nothing of value in return.

So what should we do now that Goldman and Morgan are getting access to all of the perks of being a commercial bank without any of the regulatory hurdles? According to William Cohan's latest, disastrous column for The New York Times, Goldman should cut its ties with the Fed and just be a securities firm again. When it inevitably gets into trouble at some point in the future, nobody should bail it out.

That all sounds very nice. Who could oppose ending bailouts?

The trouble is, it has absolutely no teeth. Once the Fed steps in to bail you out, everybody in the market knows it will step in again, regardless of how your business is structured. Every aspect of Goldman's business currently benefits from taxpayer perks, and the greatest perk of all is the fact that Goldman still has businesses. They would be totally and completely gone without massive government aid, and their destruction would be of their own making— they ran a business that operated with massive and unnecessary counterparty risks which was completely dependent on capital markets confidence for its functionality.

There can be no un-ringing of the bailout bell. Goldman absolutely must be aggressively regulated as a commercial bank to make sure that its subsidies are not destructive. That's the minimum reform. Still better would be to cut off the subsidies, claw-back the bonuses earned over the past two years, and break the bank up into smaller institutions that the Fed would not feel compelled to step in and save. But to pretend the bailout never happened and promise not to do it again is simply not credible.

Even if we could make the entire world forget that the bailouts happened, do we really want companies like Goldman to go back to the same business that got them into big trouble? If Goldman can put the entire financial system in jeopardy—or at least convince policymakers that its failure would do so—why do we want them to return to business as usual? We'd want them to be more rigorously regulated and structurally reformatted to prevent future disasters.

Cohan's argument is actually a bit worse than what I've presented above. There's always a tension in Cohan's writings between the broad public interest and the narrow interests of whatever firm he's writing about. He can never quite sort out whether he thinks a bunch of rapacious bastards are praiseworthy for enriching their shareholders by juicing the public, or whether the public has a right to be upset with the rapacious bastards who juiced them. But it appears that Cohan doesn't want to see Goldman to cut its ties with the Fed because those ties create problems for the broader economy. Instead, he wants them to spurn Fed money because he's worried that new regulations will make Goldman less profitable.

As it happens, I think Cohan has this profitability issue completely wrong. The two serious rules cracking down on banks with access to Fed funding were basically gutted at the final stage of the reform negotiations. Banks that deal derivatives will have to put up more capital for a small fraction of their derivatives businesses, and banks will only be able to gamble 3 percent of their capital in proprietary hedge funds. There's quite a bit of controversy as to how much of Goldman's business is straight prop trading disguised as client business, but the new rules do not seem likely to seriously curb those operations. But that cheap funding will always be there, and they'd be fools to give it up for such a paltry set of restrictions.

The important question about the Wall Street reform legislation is not whether the new rules will be good for Goldman profits and bonuses. The important question is whether Wall Street profits and bonuses are derived from activities that benefit the public good. Very little in the legislation that Congress is likely to soon approve will actually address that latter issue. And as a result, there's very little reason to believe that companies like Goldman Sachs will change their ways and stop screwing over the public for money. That doesn't mean the reform bill is a failure. It means it's a first step, and we need another, better bill after this one is approved.

Feingold v. Fernholz: Vote For Wall Street Reform

Zach Carter — Thu, 01 Jul 2010 12:09:20 -0400

Sen. Russ Feingold, D-Wis., is defending his decision to vote against the Wall Street reform bill on the grounds that it is simply too weak to prevent future crises, and Tim Fernholz is crying foul.

On policy substance, Feingold is undoubtedly correct. From Feingold:

At the start of this process I made clear that I had a simple test for financial reform -- will it stop another financial meltdown? This bill fails that test.

Fernholz claims, to the contrary:

The bill will make bailouts very unlikely and bring derivatives out of the shadows.

I just can't see how Fernholz can believe that line. Megabanks have spent the past two years "earning" their way back to health with the riskiest businesses—derivatives operations and proprietary trading. They've managed to make enormous profits from these trading operations even as the global economy has crumbled. At some point, the economy is going to catch up with the trading, and there is going to be a problem. But it will be seven to 12 years before the critical reforms reining in these activities will actually take effect (and for the most part, those reforms have been gutted). Blanche Lincoln's derivatives language has a seven-year phase-in, and will not apply to the vast majority of derivatives currently being traded. The Volcker Rule ban on prop trading still allows banks to gamble with hedge funds, and this rule will take a dozen years to implement.

In short, we'll be living through the next crisis before these rules take effect.

The bill does give policymakers a new resolution authority to shut down failing megabanks, but without a major reduction in both the scope of bank derivatives businesses and proprietary trading operations, this authority is an idle threat, and key players in the market have already expressed that view. By wrapping themselves in complex webs of trading risk—via hundreds of millions of dollars in trades every day—big banks make it nearly impossible for regulators to figure out what will happen when the bank goes down. That makes policymakers extremely reluctant to actually shut them down, with or without a resolution authority. In the 2008 meltdown, regulators had the power to shut down the ordinary, boring commercial banking operations of every bank in the country. They could have shut down nearly all of the Wachovia Corp. holding company, or the commercial banking units of financial behemoths Citigroup, Bank of America or Wells Fargo, but simply chose not to. We will see the same choices made the next time these megabanks get themselves into trouble.

By "bringing derivatives into the light," I expect that Fernholz means that much of the market will now be subject to central clearing requirements. Right now, derivatives are traded in secret, with no market or regulatory scrutiny, and central clearing will put an intermediary between the trade to verify that each firm can make good on the trade. If one firm ultimately can't make good on the trade, this intermediary makes good on it for them, preventing the cascade of defaults that policymakers were worried about when AIG went under in 2008.

It's true that about 90 percent of the current derivatives market will now be subject to market scrutiny through central clearing—but Congress carved out a major loophole allowing banks to continue trading in secret with financial firms like hedge funds and private equity. We're just going to see the riskiest aspects of the derivatives business move from bank-to-bank trading into bank-to-hedge-fund trading. What is now only 10 percent of the market will soon be much larger. Since a bank is still connected to the trade, we're still subsidizing the shadow markets, and the payments system is still at risk.

The brutal truth about this bill is that it will not accomplish what President Barack Obama and the Democratic Congressional leadership are advertising. It will not avert future meltdowns, and it will not end taxpayer bailouts. What's worse, Congressional leaders had a chance to actually get it there. If they had implemented a strong Volcker Rule or kept Blanche Lincoln's derivatives language—both of which survived until the final day of negotiations—they really would have forced banks out of destructive businesses, and at least given the resolution authority some shred of credibility. Instead, they gutted both provisions to win over Republicans while leaving Feingold to twist in the wind. That was a dramatic failure of leadership.

But for all of that, I think Fernholz is still right about the politics of this bill. It's worth a "yea" vote. Fernholz correctly notes that the new bureau tasked with protecting consumers from bank abuses is critically important. Still better is a very significant audit of the Federal Reserve, which can build more momentum for further reforms. And for all the shortcomings of the derivatives rules, we will at least put in place regulatory infrastructures that can be expanded by future legislation.

This bill will not, as Feingold claims, create "false security" for the public or the capital markets, so long as people like Feingold keep sounding the alarm about its shortcomings and continue to demand stronger medicine. We will have plenty of opportunities for major reforms in the coming months. With Republicans screaming about the deficit, a financial transactions tax is a great way to bring in tax revenue while simultaneously limiting risky Wall Street speculation. When Congress determines what to do with Fannie Mae and Freddie Mac, reformists can make that bill about the broader issue of too-big-to-fail, and push to break up the megabanks.

Despite all the ill-treatment he's received on this legislation, Feingold should still vote in favor of the Wall Street overhaul. But he should also keep pressing his colleagues to adopt more serious financial legislation.

Wall Street Reform: A Good First Step

Zach Carter — Fri, 25 Jun 2010 13:27:23 -0400

Members of Congress finished ironing out their differences on Wall Street reform last night, and the resulting bill deserves unequivocal support from progressives and conservatives alike. But while the final package is a necessary first step to overhauling the nation's out-of-control financial sector, it will do very little to change the destructive status quo on Wall Street. The bill is a good first step. The public deserves too see stronger reforms from Congress next year.

As a matter of history, sweeping financial change takes several years to secure. It took Franklin Delano Roosevelt seven years to enact all of his New Deal banking regulations, and President Barack Obama appropriately sees the 1930s crisis as the historical analog to today's meltdown-and-reform process. Obama is correct to state that the legislation approved by Congress late last night is the most significant since the Depression—but it is a hollow truth. The U.S. government has been steadily deregulating the banking industry ever since Roosevelt, and the mere act of moving policy in the opposite direction is enough to claim the mantle of dramatic reform. Actually living up to the precedent set by Roosevelt will take several years of serious work, and major legislative action during the next electoral cycle.

As for the current bill, Congressional leaders decided late last night to gut the only two serious structural reforms still on the table. With the political wind at their backs, and the finish line clearly in sight, lawmakers decimated an effort to end outright gambling by the nation's largest banks, and sabotaged a plan to rein in rampant speculation in derivatives—the out-of-control market that brought down AIG and necessitated the bailouts of every major U.S. bank. By adopting the plan from Sen. Blanch Lincoln, D-Ark., to fix derivatives and implement a strong version of the Volcker Rule banning proprietary trading, Congress could have made significant strides toward ending the too-big-to-fail financial oligopoly that held taxpayers hostage in 2008. Instead, Congress chose to reinforce the current destructive banking regime.

But while the resulting legislation will not end too-big-to-fail, prevent future bailouts, or significantly rein in risk-taking on Wall Street, it is nevertheless worth supporting. Three important measures made it through that will make the global economy a fairer and more just marketplace. Those three reforms will not be enough to prevent future financial crises, nor will they be able to ameliorate the fallout from those crises once they occur, but they are nevertheless critical.

First, we will get a thorough audit of the Federal Reserve, an agency which has funneled $4 trillion in bailout funding to the nation's financial system without any oversight or transparency. The public will finally know how it's money is being spent, and credit is due to Rep. Alan Grayson, D-Fla., Rep. Ron Paul, R-Texas, and Sen. Bernie Sanders, I-Vt., who fought hard for the plan in the face of overwhelming Wall Street lobbying. Kudos are also due to activist journalists Mike Elk and Jane Hamsher, who cobbled together a coalition of good government supporters across the political spectrum and made the Fed audit a centerpiece of the legislative debate. The Fed's blunders on the bailout of AIG have created significant momentum for real reforms, and further information about the secretive agency's operations will help build momentum for next year's financial fights.

The legislation also includes a critical overhaul of the nation's consumer protection regime wherever banks are concerned. For the first time, the public will have a regulator dedicated to defending consumers against bank abuses, with no other conflicts. The new Consumer Financial Protection Bureau has been pilloried with unnecessary loopholes, but the resulting agency will nevertheless be able to write and enforce meaningful regulations on the financial sector. This is a major accomplishment, made all the more significant by the fact that the front-runner to head the new agency has already established herself as one of the most important voices on U.S. economic policy.

As Chair of the oversight panel for the Troubled Asset Relief Program, Elizabeth Warren has taken a position with extremely limited statutory power and converted it into the only mouthpiece for the American middle class in Washington, D.C. She has done a far better job than even the most optimistic good government activists had hoped for, and giving her free reign to crack down on consumer abuses will be a major victory for the American economy. She has not been formally nominated for the post yet, but the world will be a better place once she is.

Finally, while Lincoln's derivative overhaul was largely destroyed, she did manage to preserve tough new rules regulating both food and gas derivatives. The resulting legislation will not keep Wall Street from gambling with our future, but it will make it much more difficult for financiers to jack up the prices of basic necessities in their quest for bigger bonuses. Back in the spring and summer of 2008, prices for food went through the roof as a result of heavy speculation in market for agricultural derivatives—raw bets placed on the future price of corn, rice and other farm products. The resulting price increases forced consumers the world over to pay too much for food, and sparked outright starvation in regions that could not afford the increases.

The same thing happened with gasoline. Remember paying over $4.00 a gallon? That had nothing to do with the fundamentals of supply and demand—it was a direct result of wild speculation in the market for energy derivatives. The bill approved last night will end that abuse. As a result of Lincoln's efforts, two excesses that created real, tangible hardship for millions of people will be eliminated.

This bill is unquestionably deserving of support. It will make the global economy a fairer marketplace. But it will not end the too-big-to-fail incentives that encourage Wall Street to take wild risks and stick taxpayers with the tab, nor will it sufficiently overhaul the market that brought down AIG, nor will it end the widespread practice of bigwig bankers gambling with taxpayer money. All of those reforms could have been enacted—explicit, concrete amendments were offered on all three, and Congressional leaders rejected them in an overt effort to rake in campaign contributions from Wall Street. Republicans resort to such political calculations all the time—catering to entrenched corporate interests has been their only economic strategy since the Reagan years. But it is enormously disappointing to see significant swaths of the Democratic Party adopt the same strategy (particularly the New Democrats, who should rename themselves the Wall Street Democrats after this episode) and even more frightening to see the Democratic leadership incapable of corralling these turncoats.

So support the Wall Street reform bill: it's a good first step toward building an economy that works for all citizens, not just bankers. But demand that your elected leaders finish the job next year. Too-big-to-fail lives on, and must be defeated.

The Bank Lobby Gets Desperate on Derivatives

Zach Carter — Wed, 23 Jun 2010 14:10:13 -0400

Astonishingly, as Wall Street reform enters its final hours a tired, generic corporate refrain against regulation is gaining traction. As bigwig bankers and their lobbyist brethren fight to defeat tough new rules on derivatives—the crazy casino that brought down AIG—all their sloganeers can come up with is the trite wail that serious rules will send this risky business overseas. It'd be funny if members of Congress weren't taking it seriously.

"Oh no—the business will go overseas!" is the last-ditch, we're-about-to-lose-this-one cry of despair for corporate executives in every industry. Crack down on a profitable abuse in the United States, and the entire business will move to London or Mumbai, sending jobs and tax revenue abroad-- or so the argument goes. You only hear this line when CEOs know they have no case, and have to divert attention away from the real substance of the policy debate. In the case of Wall Street abuses, this nonsense is especially ridiculous. The bank lobby really just doesn't have any good arguments to launch in its favor, so it's falling back on generic corporate jargon.

In reality, the U.S. has extremely broad authority to crack down on derivatives activity abroad, we just don't have a whole lot of good rules on derivatives for regulators to enforce. It's extremely difficult for financial institutions to simply offshore their risky derivatives business to avoid oversight. Under current law, the Commodity Futures Trading Commission has the authority to regulate any trading done by foreign firms on behalf of U.S. clients, any trading of U.S. assets conducted by foreign institutions and any trading that causes a "substantial disruption" in U.S. markets. Just about anything the CFTC wants to get its hands on, it can, and the current CFTC Chairman, Gary Gensler, is a committed reformer. We just need to write good rules for his agency to enforce.

Moreover, finance tricksters will have no incentive to move their destructive derivatives trading abroad, because the rules in other countries are, in fact, much tougher than those the U.S. is currently considering.

There are a lot of ways to crack down on Wall Street, but none of them will work without reining in the insane, secretive market for derivatives—speculative instruments that allow financiers to gamble on anything from subprime mortgages to the price of corn. Right now Wall Street is making a big push to roll-out new derivatives on movie box-office receipts, allowing the financial world to place raw bets on how much money a movie is going to make. It sounds crazy and destructive, and it is.

Germany is leading the way on derivatives reform by simply banning this kind of naked gambling outright. The U.S. effort is critically important, but much more modest. Instead of banning the casino, reformers in Congress are hoping to shrink it by ending the taxpayer subsidies that fuel it. This is at the heart of the proposal from Sen. Blanche Lincoln, D-Ark., that has earned so much ire from the bank lobby. Bankers love their taxpayer subsidies, and love converting them into bonuses—who wouldn't? The trouble is that this business is inherently risky, and can jeopardize the entire economy, as the collapse of AIG attests.

But ending subsidies is still not as strong as banning gambling, which Germany is doing. The entire European Union is currently making a move to follow Germany's lead. Businesses can't exit U.S. markets to skirt regulations if their Wild West trading schemes are outlawed everywhere else.

In the U.K., officials are poised to impose a hefty tax on all financial assets, prevent banks from ballooning their balance sheets with derivatives trades. That means, U.S. banks can't send their derivatives operations to the U.K. without paying a big price.

Outside of Europe, few nations have the financial infrastructure to support derivatives trading on the scale of what we currently have in the U.S., where $300 trillion in trades are housed at just five banks. Some Asian nations do have this kind of infrastructure, big financial firms in Asia all realize that they will have to comply with U.S. rules if they want to keep doing business in the U.S. And indeed, policymakers in Hong Kong and other financial centers are looking to the U.S. for leadership on derivatives, and are likely to mimic whatever reforms are adopted here.

But more broadly, we have to ask why the U.S. should be worried about this activity being offshored at all. Raw gambling by financial institutions brought on one of the greatest economic catastrophes in American history. It forced the government to pony up over $4 trillion in bailout funds, expanded the national debt by 40 percent, and killed over 8 million jobs. If this business goes overseas, so be it! Let other nations bailout their megabanks and wreck their own economies if they want to. Today's derivatives casino is a job-killing nightmare that produces nothing other than megabonuses for bankers. Taxpayers have no business subsidizing such economic destruction.

Compared to international efforts, Blanche Lincoln's derivatives bill is overpoweringly mild, but it remains the only serious attempt to rein in the speculative casino that crashed our economy. The fact that the bank lobby's only tactic left is the wail "offshore!" shows how desperate our bank executives have become. Congress has no business caving to such nonsense at this stage of the reform process.

A Last-Minute Wall Street Sell-Out By New Dems?

Zach Carter — Wed, 23 Jun 2010 11:17:02 -0400

A coalition of conservative New Democrats, whose leader is being investigated by a Congressional ethics committee over Wall Street fundraising, has officially come out in favor of gutting financial reform. The issue they've targeted: derivatives, the most closely watched effort of the bank overhaul. Good luck in November, guys.

New Democrats like to say they are "pro-business," but what they usually mean is, "willing to funnel federal gifts to bigwig executives." Their chair is Rep. Joseph Crowley, D-N.Y., currently under investigation by the House Office of Congressional Ethics over a fundraiser he held just days before the final House vote on the Wall Street reform package back in December 2009. Crowley is a favorite of Wall Street CEOs, who has pulled in more than $2.6 million from the finance industry over the course of his Congressional career, over 250 percent more than any other industry.

Crowley isn't the only New Dem close to Wall Street. Rep. Jim Himes of Connecticut is a former Goldman Sachs executive, Rep. Melissa Bean of Illinois has been doing big banks' dirty work for years, and New Dems score more campaign contributions from Wall Street than their regular-old-Democrat colleagues.

The new Dems are opposing the tough derivatives overhaul being pushed by Sen. Blanche Lincoln, D-Ark., known on Capitol Hill as "Section 716." The Lincoln plan is a huge blow to Wall Street profits and the first real crack in the too-big-to-fail armor worn by the nation's largest banks. The derivatives market is the risky casino that brought down AIG and Enron, and played a huge role in the inflation of the subprime mortgage bubble and necessitating the bailouts of megabanks when that bubble burst. While a little under ten percent of the market consists of risk-hedging by businesses, the remainder is a speculative nightmare.

Taxpayers actually subsidize this market by allowing commercial banks to deal derivatives. Since commercial banks have access to cheap Fed loans and FDIC-guaranteed deposits, this funding ends up feeding the global casino. If you force banks to move their derivatives operations to an independently capitalized subsidiary with no access to taxpayer perks, the market shrinks, and with it, big bank profits and bonuses.

But of course, bankers like their bonuses, and they've enlisted the New Dems to protect them. A total of 43 New Democrats are circulating a letter around Capitol Hill in an effort to defang the derivatives overhaul (interestingly, 26 New Dems have refused to sign on to this overt Wall Street sellout). Here's the key section:

"Section 716 . . . would increase systemic risk by forcing derivatives transactions into less regulated and less capitalized institutions and impede effective oversight of the derivatives markets . . . Legitimate conflict of interest concerns are addressed by the ban on proprietary trading in the Volcker rule, and, accordingly, we believe Section 716 should be removed from the legislation."

Nobody in Washington takes these claims seriously. One is a bald-faced lie, the other an effort to obfuscate other New Dem efforts to defang the Volcker Rule itself.

First, the lie. The New Dems are claiming that the Lincoln provision would push derivatives into the shadows, when, in fact, it would bring them into the light. Right now, most derivatives transactions are conducted off-balance-sheet, meaning banks don't have to disclose information about these risky deals to their investors, making it easy for them to skirt capital requirements. The idea that the Lincoln plan could actually make the derivatives market more opaque or harder to regulate than they are now is just laughable.

The Wall Street reform bill includes a set of capital rules for all derivatives trading, rules which apply to everybody who engages in derivatives activity, be they a hedge fund, a bank, or a bank-affiliate. There is absolutely no way in which Lincoln's plan would be "forcing derivatives transactions into less regulated and less capitalized institutions."

The opposite, in fact, would happen. Banks would have to put up more of their own money in order to back derivatives trades, because they wouldn't have access to taxpayer money to back them. That's why the bank lobby is fighting the Lincoln language like crazy.

The bank lobby has been pushing for weeks to secure some kind of compromise in which the Volcker Rule is substituted for Lincoln's derivatives plan. There is almost no overlap between the two proposals. The Volcker Rule bans outright gambling by banks-- Lincoln's plan is an effort to rein in gambling outside of the banking system itself.

And New Dems are also making a huge push behind the scenes to gut the Volcker Rule. As Brian Beutler has reported, New Dems Dennis Moore, D-Kan., and Gregory Meeks, D-N.Y., are part of a team that hopes to secure a giant fatal loophole allowing banks to invest up to 5 percent of their capital in hedge funds. In other words, no gambling, except when you conduct this gambling with a hedge fund. This would totally gut the purpose of the Volcker Rule. Hedge fund investments have a habit of creating absolutely massive losses—even when the upfront investment is relatively low. In the go-go years of the housing bubble, Bear Stearns put $40 million into a hedge fund to gamble on mortgages. As Mike Konczal has emphasized, when that hedge fund blew up in 2007, Bear Stearns had to payout over $3.2 billion in losses—80 times what they put into it. If that $40 million had been 5 percent of Bear's capital, the company would have been bankrupt four times over when the hedge fund went down.

The New Dems are hoping that this overt hatchet-work for the bank lobby will simply go unnoticed in the media firestorm surrounding the BP oil catastrophe and General McChrystal's inability to understand chain-of-command under a Democratic commander-in-chief. Don't let them get away with it.

Will Wall Street Reform Be Gutted By A Technicality?

Zach Carter — Thu, 17 Jun 2010 18:24:20 -0400

The tough derivatives overhaul proposed by Sen. Blanche Lincoln, D-Ark., has emerged as the key fight in Wall Street reform. That status is well-deserved. Despite Lincoln's record as a stooge for corporate executives, she is pushing what is by far the most significant threat to the Wall Street bonus machine currently on the table. But what's not as well-known is that Lincoln's plan hinges on critical technicality elsewhere in the reform package that would thoroughly defang her plan if removed.

So far as the absurdly complex world of derivatives trading is concerned, the Lincoln bill is relatively straightforward: No more taxpayer subsidies for the crazy derivatives casino that brought down AIG and Enron. Taxpayers provide two key subsidies to the commercial banking system, namely cheap loans from the Federal Reserve's discount window, and deposit insurance. Deposit insurance protects the public from losing its money when a bank fails, but that guarantee means banks don't have to pay very much to win depositors' money, making them a very cheap source of funding. Since just a handful of commercial banks deal nearly $300 trillion in derivatives, those subsidies are a very big deal.

By eliminating taxpayer subsidies, Lincoln would force banks to raise more capital against their derivatives deals, which provides a cushion against losses, and prevents banks from overextending themselves on risky activities.

To kill off the subsidies, Lincoln's plan—known as "Section 716" on Capitol Hill—would force banks to move their derivatives dealing operations into an independently capitalized affiliate company. That affiliate would have no access to taxpayer perks, and would not be able to use cheap Fed loans and deposits to book artificially inflated profits—and by extension, bonuses—on inherently risky derivatives deals.

But for this plan to work, the bank—a company with access to taxpayer perks—can't be able to simply bail out its derivatives affiliate when it gets into trouble. Those bailouts would ultimately be financed by taxpayer subsidies, rendering the whole point of the Lincoln plan meaningless. There are already laws on the book that limit transactions between banks and their affiliates (for wonks: Sections 23A and 23B of the Federal Reserve Act), but the laws are weak. Fortunately, Section 608 of the Wall Street overhaul that cleared the Senate significantly strengthens those rules.

Current law only keeps banks from bailing out their affiliates with traditional loans. If they want to use a more complicated transaction, like, say, a derivative, to salvage the affiliate, they can. The Senate bill tightens this language, barring banks from bailing out their affiliates with both securities lending and derivatives operations.

This barrier isn't ironclad, but it is meaningful. Banks can still devote up to 10 percent of their capital to transactions with an affiliate firm, but no more. That number may sound high, but remember—even if banks continuously push out 10 percent of their capital to their new derivatives affiliate, which they would never do for various technical reasons, that's only one-tenth of what they're currently allowed to use. It'd be better if this number were, say, zero, but banks really will have to put up a lot more capital to deal in the derivatives casino if the Senate language survives.

Even more important, Section 608 requires affiliates to post collateral for any transaction they engage in with their bank. That means no free lunch for the derivatives affiliate if it gets into trouble. While banks can still make (limited) arrangements to save the derivatives affiliate, the affiliate has to put up something of equal value in exchange. In other words, the bank can't just bailout the derivatives house with taxpayer subsidies.

So watch Section 608 very closely as the conference committee on Wall Street reform reconvenes next week. With derivatives becoming the hot-button issue for the financial overhaul, very few lawmakers are interested in being caught publicly selling out to megabanks this late in the reform process, particularly with the November elections just a few months away. But they may very well gut a handful of less-well-publicized technical measures in an effort to gut the derivatives reform by proxy.

Real Reform Gains Traction: Lincoln Stands Firm on Derivatives Overhaul

Zach Carter — Thu, 17 Jun 2010 09:49:04 -0400

As the House and Senate publicly iron out their differences on Wall Street reform during conference committee, the most important aspect of the overhaul is gaining strength behind the scenes. Sen. Blanche Lincoln, D-Ark., is standing firm on her tough derivatives bill, and continues to garner unlikely allies from within the Federal Reserve as the final vote on the provision approaches.

The latest high-profile supporter of Lincoln's bill is St. Louis Fed President James Bullard, according to a Senate source familiar with the matter. Bullard joins Kansas City Fed President Thomas Hoenig and Dallas Fed President Richard Fisher as recent co-supporters of the measure to rein in megabank derivatives operations. Other key members of the conference committee, including House Agriculture Committee Chair Collin Peterson, D-N.D., are also offering support for the provision, which is likely to come up for a vote next week.

Both the bank lobby and reformists recognize that Lincoln's effort—known on Capitol Hill as Section 716—is the most serious proposal to rein in Wall Street still on the table for 2010. The bill's strategy is simple: End taxpayer subsidies for the derivatives market—the crazy casino that brought down AIG, Enron and Long-Term Capital Management. Right now, five megabanks score enormous profits by backing their derivatives operations with cheap loans from the Fed's discount window and taxpayer-guaranteed deposits. This cheap funding makes derivatives enormously profitable, and encourages banks to fuel enormous speculative casinos. Speculation on that magnitude is inherently unstable, and when the casino comes crashing down, the result is a disaster for the global economy (think AIG and Lehman Brothers).

By forcing banks to move their derivatives dealing into separately capitalized affiliates with no access to taxpayer perks, the business would become less profitable, and the global capital markets casino would shrink, putting the broader economy on stable footing.

But since those taxpayer subsidies mean big profits for banks, they also mean big bonuses for bank executives. And so every Wall Street lobbyist in Washington has been targeting Section 716, and they've convinced some top-level, bank-friendly officials like Fed Chairman Ben Bernanke and Treasury Secretary Timothy Geithner to defend them.

But lately the political wind has shifted to Lincoln's back. Former Fed Chairman Paul Volcker, previously an opponent of the provision, reversed his opposition, saying he hadn't fully understood the details of the plan. A host of high-profile economists, including Nobel Laureate Joseph Stiglitz, former IMF Chief Economist Simon Johnson, Nouriel Roubini, Robert Johnson, Jane D'Arista and others have endorsed 716, saying that it's the last best chance to end Wall Street's reliance on taxpayer bailouts.

Derivatives are the central way that megabanks make themselves too-big-to-fail. By engaging in hundreds of millions of dollars worth of derivatives trades every day, banks enshroud themselves in complex webs of debt that no regulator can decipher. If a bank like that finds itself on the verge of collapse, regulators simply cannot predict what will happen if the bank is shut down. The Wall Street reform bill includes expanded authorities for regulators to shut down failing financial titans—but regulators will not use those powers on banks that run derivatives casinos on the scale of those currently in existence, in which five banks control nearly $300 trillion in trading. That's trillion, with a 't.'

Lincoln made a few concessions earlier this week in an effort to appease critics, but so far, none of them have been important. The most significant move will allow the Fed to provide derivatives dealers with emergency funding in the event of a financial collapse—powers known in Washington as 13(3) authorities. For many reform advocates, this looked sinister—the point of the Lincoln language is to remove taxpayer subsidies, but Lincoln would now permit emergency Fed loans.

This is ultimately a non-issue. The point of Lincoln's overhaul is to end the situation in which banks fund derivatives operations with loans from the Federal Reserve's discount window and cheap taxpayer-backed deposits. Discount window lending is radically different from the kind of lending the Fed does under 13(3). Banks go to the discount window all the time for loans as part of the ordinary course of business, and those loans come with a low, predictable interest rate (currently 0 percent). Lending under 13(3), by contrast, comes with strings attached. For all the faults of the Fed's handling of the AIG bailout, the Fed received an 80 percent stake in the company and discharged the firm's CEO.

This is not the sort of help that derivatives dealers want from the government—what they want are low-interest-rate loans from the Fed, and cheap FDIC-insured deposits. The prospect of emergency Fed lending doesn't change the incentives for a derivatives dealer any more than the prospect of some future Congress enacting a new law authorizing broad bailouts of derivatives dealers does.

Without access to discount window loans or FDIC-insured deposits, banks simply cannot operate. Even with access to emergency Fed lending, banks will have no choice but to move their derivatives dealing operations into an independently capitalized affiliate, and that affiliate will not be able to fund derivatives with cheap taxpayer guarantees as part of the basic business model. As soon as those operations are pushed out, banks will immediately have to put more capital behind them, and the entire derivatives casino will shrink. The reform is still fully intact.

No law can ban future bailouts, whether they be from the Fed or Congress. When the next financial crisis hits, policymakers will bail out whatever firms they deem necessary to prevent a collapse. If they need to change the law, they'll go to Congress. If Congress spurns them, policymakers will conduct their bailouts under-the-table by letting firms get away with overly optimistic accounting. What we can do is limit the potential for that next crisis to ever come about. Lincoln's plan is the most important provision for preventing a future crisis still on the table.

Commodity Futures Trading Commission Chairman Gary Gensler was one of the chief advocates for allowing 13(3) funding to derivatives dealers, according to a Senate source familiar with the negotiations. Gensler is the most serious advocate for derivatives reform in Washington, and he has been instrumental in pushing to fix another major loophole in the regulations requiring central clearing of derivatives (the current bill doesn't allow regulators to enforce those regulations, and Gensler has come out strongly in favor of fixing the problem during the conference committee).

The fight for Lincoln's bill is by no means over. The endorsement of three Fed presidents comes as a coalition of Wall Street-friendly New Democrats, led by Reps. Melissa Bean, D-Ill., Joe Crowley, D-N.Y., and Jim Himes, D-Conn., push back against the Lincoln language. The New Dems argue that 716 can be replaced by a strong Volcker Rule, which bans speculative gambling by commercial banks. The argument is totally disingenuous—the Lincoln plan is about limiting speculation throughout the financial sector, not just in banks themselves.

So far, neither Treasury nor the New Dems have had much luck persuading members of the conference committee to buck 716. Almost nobody in Washington wants to be caught committing an epic sell-out to Wall Street during the final stages of the reform process, when the public is watching every move. We've known for several weeks that some version of Wall Street reform would ultimately pass Congress. If Lincoln holds firm, that reform will actually be significant.

Scaling Back Our Bloated Financial Sector

Zach Carter — Wed, 26 May 2010 16:38:31 -0400

It's been apparent for several weeks that the Wall Street reform bill will not cut down the largest U.S. banking behemoths to a safe and manageable size. But individual oversized banks are not the only problem Big Finance poses to the economy—the overall sector is much too large, and if we do not shrink it, we'll be dealing with difficult economic conditions for years to come.

Right before the banking system crashed, the financial sector accounted for an astonishing 40 percent of corporate profits. That share of the economy plunged as banks sought their bailouts, but by the end of 2009, finance was back, again accounting for almost 36 percent of corporate profits.

When the financial industry takes up that much of the economy, it becomes a big problem for two reasons. First, instead of serving as a catalyst for broader economic growth, finance is simply devouring other sectors of the economy. Like money, finance is not a goal in and of itself—it's just a way to support goods and services that make life better. At 40 percent of profits, finance is not supporting that activity, it's destroying it.

Second, for finance to take up 35 to 40 percent of the total profit pie, it has to be engaging in a lot of raw speculative gambling, rather than economically productive lending. That creates a tower of speculation that can easily topple with a single event—and the resulting mess can be very hard to clean up. As Nomi Prins has detailed, between 2002 and 2008, only about $1.4 trillion in subprime mortgages were issued, while about $14 trillion in securitized bets were derived from these mortgages. When the subprime market cratered, all that speculation made a big problem much bigger.

So in addition to cutting the biggest banks down to size, we also need to scale back the entire financial sector. There are a handful of provisions in Wall Street reform packages approved by the House and Senate that would help accomplish that goal. Unfortunately, the bank lobby, and in some cases, the Obama administration itself, is fighting those provisions. Here they are:

1. Capital and Leverage

Banks amplify their bets in the capital markets by using leverage—borrowing a lot of money. If you buy $10 million worth of stock, and it goes up 10 percent, you make a ten percent return-- $1 million. But if you borrow $490 million, put up $10 million of your own money, and put all of it into the same stock, a 10% gain in the stock price scores you $50 million—a 500% return (it would actually be a little less, as you'd have to pay interest on that $490 million loan, but you get the idea). But if the stock drops just 2 percent, you lose all of your own money, and find yourself $490 million in debt. You are ruined.

Rep. Jackie Speier, D-Calif., managed to squeeze an amendment capping bank leverage at 15-to-1 into the House reform bill, meaning that banks could not borrow more than $15 for ever $1 they put up. That's good-- less leverage means less overall financial activity. Sen. Susan Collins, R-Maine, managed to get a weaker, but related provision into the Senate bill, which would force megabanks to reduce their leverage.

Unfortunately, the Treasury Department and the Federal Reserve are fighting both amendments. Even worse, as Mike Konczal notes, the Treasury is also fighting hard against international agreements to limit bank leverage.

2. Derivatives spin-offs

Five big banks control over 96% of the derivatives market, which totals literally hundreds of trillions of dollars. One of the reasons this market is so big is that banks fund these operations with deposits. Since the government guarantees bank deposits against losses, this funding is cheaper than anything else the bank can get outside of the Federal Reserve, which also lends to all five of those banks. Sen. Blanche Lincoln, D-Ark., pushed a provision through the Senate which would bar any commercial bank that deals derivatives from receiving Fed loans. In practice, this would force the banks to move their derivatives dealing operations into a separately capitalized subsidiary.

The banks, Treasury and the Fed are all fighting this provision tooth-and-nail because it would significantly alter the way the derivatives business is funded. Instead of being able to rely on cheap government money, banks would have to finance their derivatives operations in the more expensive capital markets. When something gets more expensive, people do it less, so the Lincoln plan (authored by Sen. Maria Cantwell, D-Wash.) would trim back the derivatives casino.

3. Consumer Financial Protection Agency

One way banks eat up the broader economy is by simply stealing from consumers. Just about everyone has had a bad experience with a credit card, mortgage or overdraft rip-off. These are, first and foremost, bad for our pocketbooks. But what is bad for our pocketbooks is bad for other businesses—it means we have less to spend on goods and services. So by screwing consumers, banks are really sticking it to the broader economy.

The existing bank regulators at the Federal Reserve and the Office of the Comptroller of the Currency simply have not enforced consumer protection rules over the past decade. Their primary goal is ensuring bank profitability, so if banks profit from consumer abuses, they don't really care. We can end this system of abuse by establishing a strong, independent Consumer Financial Protection Agency (CFPA) tasked only with looking out for consumers. The House language on the CFPA gives the agency more independence and broader authority to both write and enforce regulations than the Senate version, but it also exempts abusive auto dealers from the agency's jurisdiction, which the Senate version does not do.

So what else in the bill will cut back on our oversized finance system? Not much. There is a very weak version of the Volcker Rule, which bans banks from gambling with taxpayer money, but it will take years to implement and can easily be gutted by regulators. That leaves a handful of key provisions that should be focus of the reform fight next year:

1. A financial transactions tax.

Many of our current economic woes are tied to excess speculation in finance. By imposing a tiny tax on trades of stocks, bonds and derivatives, the government can discourage rank speculation while bringing in a lot of revenue for the federal coffers. A tax of just a few tenths of one percent will not seriously effect long-term investors. But for speculators who place big bets on the movement of stocks over the course of an hour, or for flash traders who buy and sell millions of shares in less than a second, this kind of tax actually would matter. Based on trading volumes from 1997, which are vastly lower than today's trading volumes, economist Dean Baker estimates that this tax could bring in $100 million a year in tax revenues, even if the overall trading volume fell by 25 percent.

2. Glass-Steagall

Banks don't just use taxpayer-guaranteed deposits to back their derivatives bets, they also fund all kinds of risky securities businesses with deposits. In the 1930s, Congress passed the Glass-Steagall Act, which barred banks that accept deposits and make loans from operating in the securities markets. By separating taxpayer guarantees from risky activity, the move made that risky activity less profitable, and by extension, less profuse.

3. Regulate Hedge Funds and Private Equity

The current bill doesn't really do anything to rein in these shadowy entities. They'll now have to register with the SEC . . . just like Bernie Madoff.

Sen. Cantwell's Courageous Vote

Zach Carter — Thu, 20 May 2010 13:18:00 -0400

The most courageous vote yesterday in the Senate was cast by Sen. Maria Cantwell, D-Wash., who refused to let the Senate sign-off on an unnecessarily weak Wall Street reform bill. Cantwell has been trying to fix a fatal loophole in the derivatives language which prevents regulators from enforcing new rules on the secretive shadow markets that brought down AIG. So far, the Democratic leadership has sided with the banks against Cantwell.

Here's the basic problem. When Sens. Chris Dodd, D-Conn., and Blanche Lincoln, D-Ark., combined their derivatives bills in April, they cut language from Lincoln's bill that would have made it illegal for banks to break the new derivatives regulations. As a result, the bill does a pretty good job listing activities that banks cannot engage in, but if banks simply decide not to follow the rules, regulators will not be able to crack down on them.

These problems were first reported in a story I wrote for AlterNet in April. Since then, HuffPost's Shahien Nasiripour has elaborated on the matter, and both Mike Konczal and David Dayen have explained the issue in detail. I have also spoken about the conundrum with Laura Flanders begin_of_the_skype_highlighting end_of_the_skype_highlighting on GRITtv. Sen. Cantwell has an amendment that would close this loophole and make it an explicit violation of law for anyone to break the new derivatives rules Congress will enact. But for some reason, Dodd and Senate Majority Leader Harry Reid, D-Nev., have prevented that amendment from coming up for a vote on the Senate floor.

This is a separate, and much more fundamental fight than the contest between Dodd and Lincoln over whether banks will have to spin-off their derivatives businesses—which Dodd also appears to be hellbent on gutting. The spin-off issue would require that any derivatives dealing operations be divorced from taxpayer guarantees that commercial banks benefit from. It's a very important provision, but the loophole Cantwell wants to close has to do with the basic functioning of the derivatives market—regardless of which firms operate as dealers. Without Cantwell's amendment, Lincoln's spin-off language is rendered meaningless.

Make no mistake, derivatives are the central fight in Wall Street reform. The debate over the Volcker Rule in large part hinges over the proposal's impact on derivatives trades. The market amounts to hundreds of trillions—trillions with a "t"—in bets on anything you can dream up. These trades occur totally in the dark, without either market or regulatory supervision, making the derivatives market a hotbed for fraud and abuse, as evidenced by the Securities and Exchange Commission's fraud suit against Goldman Sachs. The subprime mortgage nightmare simply could not have expanded to its disastrous scope without the derivatives market, which allowed banks and hedge funds to bet on lousy mortgages. Nobody knows what underlying assets will spark the next epic financial crisis—this time around it was housing-- but if derivatives are not reined in, they will be used wreak havoc on the broader economy.

Wall Street banks make billions of dollars every year from keeping this business in the shadows. J.P. Morgan Chase alone thinks that bringing the market out of the shadows will cost it up to $2 billion in annual profits.

The central problem is the secretive nature of the derivatives market. When banks want to execute a trade, they just call each other up and agree to it, and the trade is finished. Nobody in the market has to sign-off on their ability to make good on these bets, and no regulator can look out for abusive or reckless trading. The minimum reform necessary would require a third-party to guarantee the bets that each side of the trade makes. When Bank of America bets with AIG, this third-party not only verifies that each company can make good on their side of the contract, this third-party agrees to pay in case one side does not follow-through on their obligation. This process is called "central clearing," and the third party is known as a "clearinghouse."

Central clearing prevents the cascade of defaults that policymakers were worried about when AIG went down in 2008. Once it became clear that AIG couldn't make good on its derivatives bets, there was a major worry that dozens of other banks would take serious hits, collapse, and cause dozens of other collapses in the process. If we have a clearinghouse intermediating all derivatives trades, it will be the clearinghouse, not taxpayers, who are on the hook when derivatives bets go bad.

The current reform bill contains a host of good central clearing requirements, but if Cantwell's amendment is not adopted, regulators will not be able to enforce those rules.

This is not a matter of liberal or conservative dispute. Every serious student of Wall Street reform, from Republican Treasury Secretary Henry Paulson to President Obama to socialist Sen. Bernie Sanders of Vermont, believes that central clearing is absolutely necessary to prevent the insanity we saw in 2008. All Cantwell wants to do is actually enforce those rules. She is absolutely right to withhold her vote for the bill until it meets this very low minimum standard. Dodd and Reid may be able to steamroll her by winning over Republican Scott Brown of Massachusetts. That would be a political victory for the Democratic leadership, and a major defeat for our economy.

Chris Dodd, Phil Gramm, And The Legacy Of A Statesman

Zach Carter — Wed, 19 May 2010 15:06:40 -0400

Few realized it at the time, but Senator Chris Dodd's political career ended on June 12, 2008. That day, Portfolio magazine published its blistering expose on Countrywide Financial's "Friends of Angelo" program, naming the Democrat from Connecticut as one of the top beneficiaries of the subprime kingpin's political favors program. It's too late for Dodd to save his Senate seat. It's not too late for him to clear his name, but time is running out.

The ferocious response to Dodd's implication in the scandal has always, in truth, been somewhat curious. To this day, the evidence against Dodd remains nowhere near as damning as that against Sen. Kent Conrad, D-N.D., and unlike Conrad, Dodd never openly lied about his communications with Countrywide (at least, never got caught). Conrad has emerged from the scandal virtually unscathed, while Dodd is looking for a new job.

As Wall Street reform legislation has staggered along over the two years since the Portfolio story, the Countrywide scandal has faded to the background, with Dodd's key role in the legislative process returning to center stage. Although Dodd has never emerged as a reformist warrior, he has at times appeared to be a good-faith negotiator seeking significant reforms while making necessary concessions.

But what a list of concessions. During the debate over new credit card regulations, Dodd protected payday lenders by scuttling efforts to cap consumer credit interest rates at 36%. Once the broader financial reform effort was underway, Dodd all but gutted President Barack Obama's plan to create an independent Consumer Financial Protection Agency that could both write and enforce consumer lending regulations. Dodd carved out several deep loopholes in the agency's enforcement jurisdiction, placed it under the anti-consumer Federal Reserve, and dramatically restricted its ability to actually write rules by giving the existing, failed bank regulators veto power over any of the new agency's proposals. To his credit, Dodd never pretended these were substantive or productive concessions, instead openly acknowledging that the moves were intended to garner votes.

When it came time for Dodd to take action on the "Volcker Rule," Dodd again went to war against reformers on behalf of Wall Street. The proposal from Obama and former Fed Chairman Paul Volcker would ban risky proprietary trading by economically essential commercial banks, preventing them from gambling with taxpayer money. But instead of writing hard rules, Dodd kicked the issue to bank regulators, ordering them to conduct a study of the issue and allowing regulators to write their own regulations. Critically, Dodd did not requiring that anything actually be done to implement Obama's signature Wall Street reform.

The same scene appears to be playing out this week on derivatives—the crazy casino that brought down insurance giant AIG. Dodd cut deals with Sen. Blanche Lincoln, D-Ark., to weaken her strong derivatives bill, in the process, shooting the legislation full of loopholes that could make the remaining rules impossible for regulators to enforce. Beyond derivatives, Dodd cut a deal with Sen. Tom Carper, D-Del., that restricts the ability of state regulators to crack down on predatory lending.

All of these capitulations directly aided Wall Street at the expense of the rest of the economy. But for all of these concessions, Dodd could at least make the case that they were either honest mistakes (the derivatives loopholes), or concessions Dodd believed were necessary to win support for the overall package. Dodd has never been able to call himself a strident reformer, but he could at least defend himself against charges that he was going to bat for Wall Street.

It is impossible to find even a theoretical justification for Dodd's actions over the past 24 hours. Late on Tuesday, Republicans unleashed a swarm of procedural maneuvers to block a vote on an amendment from Sens. Jeff Merkley, D-Ore., and Carl Levin, D-Mich. The amendment would require the implementation of Obama's signature Wall Street reform—the Volcker Rule. Instead of fighting for his Democratic colleagues, Dodd has been all too happy to roll over for the Republicans, and tried today to end debate on the bill without even bringing Merkley-Levin to a vote.

Let me repeat that. Dodd isn't just refusing to support Merkley-Levin, he's refusing to even allow it a vote on the Senate floor. There is no way to gauge the political expediency of Dodd's support or withholding of support without at least getting a vote on the measure. This was a naked attempt to prevent the Wall Street reform package from getting stronger.

The Merkley-Levin fiasco isn't Dodd's only very recent sin. He also attempted to prevent key amendments from Sens. Maria Cantwell, D-Wash., and Byron Dorgan, D-N.D., from coming to a vote. Both the Cantwell and Dorgan bills would significantly strengthen derivatives regulation. Their amendments are believed to have widespread support, and Wall Street is very worried that the provisions could actually be adopted—if allowed to come to a vote on the Senate floor. Dodd is standing in the way. Cantwell also has a bill co-sponsored by Sen. John McCain, R-Ariz., to reinstate Glass-Steagall, the Depression-era law separating boring commercial banking from risky investment banking that protected our economy from bailouts for fifty years. Dodd is also blocking that amendment.

At the same time, Dodd is preparing what is rumored to be an epic "manager's amendment"—a conglomeration of all the back-room deals he has cut with various senators in order to win their support for the overall bill. If the manager's amendment is long enough, it becomes very hard to vote against, because sinking it would in turn sink the overall reform package. Dodd currently plans to use the manger's amendment to further sabotage Sen. Lincoln's plans to overhaul derivatives.

So in the past 24 hours, Dodd appears to have been going to bat for Wall Street, not out of concern for any greater political good, but exclusively for the purpose of padding the profits of big banks. The Senator from Connecticut cannot boost his own electoral prospects with this activity—that era of Dodd's life will soon be over. But some speculate that if Dodd can curry enough favor with Wall Street, he can secure a cushy and lucrative position when he leaves office next year.

If Dodd were to continue down this path, it could make him the Democratic Party analog to Phil Gramm, the infamous Republican Senator from Texas who took a job at Swiss banking giant UBS after pushing through a barrage of deregulatory legislation during his Senate career. Gramm is a very wealthy man—in addition to his UBS money, Gramm's wife Wendy Gramm (herself a former derivatives regulator) took home millions while serving on the board of Enron after her husband pushed through a bill blocking the regulation of derivatives that Enron specialized in. Nothing can take away that money. But history has already passed its judgment on the Gramms—they are Exhibit A in political corruption, the clearest example of everything that is wrong with American politics.

It is not too late for Dodd to avoid leaving a similar legacy. If he decides to fight for amendments that strengthen the Wall Street bill, his reputation can be partially salvaged. If he uses the manager's amendment to include strong legislative improvements, he can go down in history as a fearless reformer with a pragmatic streak. But if Dodd does not stand up to Wall Street and its Republican backers, he will forever be remembered as Angelo Mozilo's man in Washington. No amount of money is worth such public shame.