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« In Geithner We Trust (But Why?) -- Ratigan | Main | Ron Paul Is Asking For Your Help, HR 1207 'Has Been Gutted' »

Senator Maria Cantwell: Wall Street Has A Gambling Problem

By Senator Maria Cantwell

Taxpayers have put more than $24 trillion on the line to resuscitate Wall Street after the economic meltdown of last year.  With the help of this massive taxpayer support, the nation's largest banks are posting record profits.  That, by itself, is not bad.  After all, our economy runs on profit, and the whole point of the government aid was to get the banks out of intensive care.  The problem is that many of these banks have resumed their old habit of using other people's money to gamble with the same risky unregulated derivatives that led us into this crisis.

In the midst of the worst economic crisis since the Great Depression and with job losses and home foreclosures mounting, it's no wonder the rest of us are asking how this can be allowed to continue.

Look no further than the powerful lobbying arm of the financial services sector, which has spent at least $220 million this year lobbying Congress to stave off new rules to prevent another collapse. That is over $500,000 in lobbying for every member of Congress, which might help explain why, to date, nothing has been fixed in our porous financial regulatory system. Americans want to know when Congress will put an end to the Wall Street's secret off-book gambling schemes and restore our capitalist system by requiring real transparency and true competition.

It appears that Wall Street is not acting as a force for economic expansion, providing access to capital for companies that make things. Rather, it seems, Wall Street is using government bailouts to lever up.

Wall Street uses exotic financial tools to fund what amounts to unregulated gambling. Wall Street wants to keep its schemes too complicated to understand so that the roulette wheel can keep turning. While derivatives trading can be complex, the underlying concept is simple enough: keep trading secret and off-book and pocket profits from both sides of a trade.

Unregulated derivatives are a cash cow hidden from public view and run with less oversight even than actual casinos. The five largest U.S. commercial banks are on track to earn more than $35 billion this year trading unregulated derivatives. According to the Office of the Comptroller of the Currency, the nation's five largest commercial banks held 95 percent of the $291 trillion derivatives portfolio of the country's 25 largest bank holding companies at the end of the first quarter. More than 90 percent of those derivatives were in unregulated trading.

Prior to 2000, as a matter of federal law, all derivatives were required to be traded on regulated central exchanges overseen by the Commodity Futures Trading Commission, unless specifically exempted by the Commission. The oversight protected the public from the inherent risk posed by derivatives and from the chaos that could result from unscrupulous or reckless trading.

After 2000, the field was cleared of referees and market players were left to run wild with unregulated derivatives.

The change occurred when Wall Street asked for -- and received from Congress -- an exemption from all regulation of a massive class of derivatives, including a preemption of state gambling laws. Literally, gambling laws had to be overridden. Derivatives dealers acknowledged the gambling inherent in derivatives trading and the business they stood to gain from this exemption.

Deal-making became so opaque that it was impossible to follow. The true values of exotic instruments were impossible to determine.

Imposing full transparency and true competition will require moving derivative trades onto regulated exchanges. That would mean full transparency of trading prices and volumes, reporting requirements for large trader positions, and adequate capital reserves to protect against a default. The government needs full anti-fraud and anti-manipulation authority. Giving regulators this power will ensure a transparent and competitive marketplace and will ensure that violators will go to jail.

Wall Street has a lot of reasons for wanting to keep the unregulated derivatives casino open for business. Specifically, Sanford C. Bernstein & Co. analyst Brad Hintz recently estimated that Wall Street revenue from trading unregulated derivatives might decline by 15 percent just by moving trades to clearinghouses. That is because the current system enables banks to profit from secret pricing - pocketing the gap between what they charge customers and what they pay to hedge their trades. With transparent pricing and true competition on an exchange, higher gambling returns are much more difficult to achieve. Public disclosure of price data would also mean that dealers no longer had better price data than clients.

Let's embrace productive capitalism, not casino capitalism, by restoring transparency and true competition in the commodities markets. Our nation's financial sector can act as a great force for job creation and production. We should not stand by and let their dimly lit casino bring us all down once again.

Maria Cantwell is a U.S. Senator from Washington State.

This editorial first appeared on The Huffington Post


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Reader Comments (14)

An Object Lesson in Governmental Failure: Derivatives reform
Nov 2, 2009 at 9:19 PM | Registered CommenterDailyBail
Florida political leaders consider state bank: 2% mortgages, 6% credit cards, no state debt costs

Have you seen this one, Wil?
Nov 2, 2009 at 9:24 PM | Registered CommenterDailyBail
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Nov 2, 2009 at 9:42 PM | Registered CommenterDailyBail
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Nov 2, 2009 at 9:43 PM | Registered CommenterDailyBail
Maria Cantwell is also for the government takeover of our health care by supporting an aggressive public option. She is a big believer in global warming. Her carbon scheme will force carbon producers out of business (what Obama wants) in the hopes that energy independence will magically appear through the green movement and Obama’s more stick less carrot approach. Both are doomed to failure if tried by the left. She is also a big supporter of the United Nations. She takes no recent position on the war in Iraq or Afghanistan that I could find.
Nov 2, 2009 at 11:02 PM | Unregistered Commentergobias
Gobias...you still haven't figured it out...this website is not about any of those things...if i used any sort of political filter before allowing a post to go up, then there would never be any posts...everyone would fail the test...

Bailout politics make for strange bedfellows...if someone makes news against the banking oligarchy we will cover it regardless of party...
Nov 3, 2009 at 12:47 AM | Registered CommenterDailyBail
DB, do you just not want to see the big picture? Here is some required reading...

One change (yes, the one you always want to talk about) always leaves the way open for the establishment of others.
Niccolo Machiavelli

Men are so simple and so much inclined to obey immediate needs that a deceiver will never lack victims for his deceptions.
Niccolo Machiavelli

No enterprise is more likely to succeed than one concealed from the enemy until it is ripe for execution.
Niccolo Machiavelli

At the end of this, the rich will be richer and the rest of us will have less money and more debt. That is only part of the plan. What we lose in the meantime will change things forever. They will make us suffer and then take away our freedoms to "save us". Does that sound familiar?
Nov 3, 2009 at 1:33 AM | Unregistered Commentergobias
It's catching on, my Friend. Looks like Virginia is showing interest as well.
(examiner.com is blocked by my day jobs' internet filter, but will check it out later from the home office)

The states had the power first. It is the states that codified the union. If the Fed doesn't behave, the States will take it back. California, Florida and Texas alone have more natural resource capital from which to extend credit than most of Europe.

This may be the beginning of a new era:
Nov 3, 2009 at 11:05 AM | Unregistered CommenterWil Martindale
"Senator Maria Cantwell: Wall Street Has A Gambling Problem"

Fortunately for Wall St, their gambling problem dovetails PERFECTLY with the American Public's Easily-Victimized Problem.
Nov 3, 2009 at 3:51 PM | Unregistered CommenterRecoverylessRecovery

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