Just five years after the worst financial crisis since the Great Depression wiped out $11 billion of personal wealth in the U.S. and eliminated millions of jobs, major banks have helped draft new legislation that deregulates derivatives trading — which some financial analysts believe was one of the main causes of the 2008 financial downturn.
The bill, “To amend provisions in section 716 of the Dodd-Frank Wall Street Reform
and Consumer Protection Act relating to Federal assistance for swaps entities” (H.R. 992),
would exempt many types of trades from new regulation. Derivatives are a financial instrument representing the risk of a transaction. It was Wall Street investments on defaulted mortgage swaps derivatives that inflated banks’ risk portfolios beyond their cash-in-hand, leading to the 2008-2009 mortgage crisis. This resulted in at least 4 million home foreclosures across the U.S.
The New York Times uncovered emails indicating that bank lobbyists played a direct role in writing the legislation and ensuring its passage earlier this month.
“Bank lobbyists are not leaving it to lawmakers to draft legislation that softens financial regulations. Instead, the lobbyists are helping to write it themselves,” write New York Times contributors Eric Lipton and Ben Protest.
The New York Times revealed that Citigroup’s recommendations were reflected in more than 70 lines of the House committee’s 85-line bill. Two paragraphs, prepared directly by Citigroup in conjunction with other Wall Street banks, were copied nearly word for word. (Lawmakers changed two words to make them plural.)
The softened regulations are not reflective of broad American support for increased regulation of Wall Street banks as a means to prevent acute financial recessions in the future.
Many lawmakers have objected to provisions that take away regulatory oversight of derivatives trading. “The derivatives provisions in the Wall Street Reform Act constitute an important part of the reforms being put in place to strengthen our financial system by improving transparency and reducing risks for market participants,” wrote Treasury Secretary Jack Lew in a letter to House Financial Services Committee Chairman Jeb Hensarling (R-Texas). “These reforms should not be weakened or repealed.”
At the time of the 2008 financial collapse, a poll found that 62 percent of Americans thought the cause was too little government regulation of financial markets.
Greasing the wheels for a smooth committee vote were robust financial donations made by big banks to members of the House. According to MapLight, an organization analyzing the influence of money in politics, the House Agriculture Committee members voting for H.R. 992 have received 7.4 times as much money from the top four banks as House Agriculture Committee members who voted against the bill.
The top four banks — Bank of America, Goldman Sachs, JPMorgan Chase and Citigroup — collectively hold 93.2% of all derivatives contracts, $208 trillion in notional value. House Agriculture Committee members who voted in favor of H.R. 992 received an average of $8,726 from the top four banks, while House Agriculture Committee members who voted against the bill received just $1,179, on average, from the top four banks.
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