Webster G. Tarpley | The utter failure of Wall Street reform means that the door is now wide open for the second wave of the current world economic depression to continue.

Webster G. Tarpley | The utter failure of Wall Street reform means that the door is now wide open for the second wave of the current world economic depression to continue.

Obama-Dodd-Frank FinReg Monstrosity Delays Derivatives Curbs until 2022!

15 Jul 2010 | 10:38 am Infowar

Webster G. Tarpley
July 15, 2010

The Obama-Dodd-Frank financial regulation bill, a miserable excuse for real Wall Street reform, is now about to gain final approval in the Senate. This wretched bill is now supported by the New England liberal (meaning Wall Street) Republican clique including Olympia Snow, Susan Collins, and Scott Brown, who are joined by the notoriously corrupt reactionary Democrat, Ben Nelson of Nebraska. This bill will create a multitude of new regulations and a number of large new bureaucracies, but it is utterly devoid of any bright-line prohibitions against the causes of the financial panic which struck the United States in 2008, and which continues to the present day in the form of a world economic depression.

The cause of the 2008 banking panic was that zombie banks and hedge fund hyenas were speculating with toxic and highly leveraged derivatives. The new bill does virtually nothing to attack the causes of this ongoing financial disintegration. It is a total defeat for the interests of the American people, and an historic victory for the Wall Street financier oligarchy which owns both the Democratic and Republican parties.

Stockbrokers and investment bankers have battled mightily to avoid any legal compulsion to act in the best interests of their clients, who are often the retail investors which both parties claim to care so much about. The new bill will not prevent unscrupulous used-car dealers from ripping off their customers through inflated financing costs. There is nothing in the bill to stop the plague of foreclosures, which last year turned almost 4 million American families into displaced persons on the home front. There is no ban on the disastrous use of Adjustable Rate Mortgages (ARMs), the financial equivalent of time bombs, which are ruining the lives of so many millions of Americans. There is no cap on leverage banks can use in financial transactions. Despite widespread complaining about the Federal Reserve, this bill gives the Fed more regulatory power rather than less. It represents the complete triumph of the Wall Street derivatives lobby, so much so that even hardened cynics are astounded by the impudence and insolence of Obama and both parties in the Congress.

The graveyard of Hope and Change

Senator Dorgan proposed an amendment to abolish the concept of banks that were too big to fail. His amendment was rejected. Senator Kaufman tried to limit the size of banks, but his amendment was deleted. Senator Whitehouse tried to limit interest rates on credit cards and predatory payday loans, or at least to allow states to regain their regulatory role in this area, but he was defeated. Granted, many of these amendments were mere public relations exercises that were always virtually doomed to failure.

Senators McCain and Cantwell tried to restore the firewall, contained in the landmark Glass-Steagall Act of 1933-1999, which rigorously separated commercial banks with FDIC insured deposits on the one hand from investment banking and stock-jobbing on the other. Glass-Steagall was one of the signature legislative achievements of the New Deal, and there are few better illustrations of the deep hostility of the modern Democratic Party and of Obama in particular to the heritage of Franklin D. Roosevelt than the stubborn refusal of the degenerate Democrats of today to force through the necessary restoration of the Glass-Steagall protections – even in the wake of a breakdown crisis of the entire Anglo-American banking system.

Senator Blanche Lincoln of Arkansas, who is fighting for her own political survival because of her record of subservience to Wall Street, tried to redeem herself with paragraph 716 of title VII of the bill, an attempt to ban trading in credit default swaps (derivatives) by FDIC banks. Notice that by this point there was no effort whatsoever to prevent these banks from dealing in collateralized debt obligations (CDOs), which were the toxic derivatives which destroyed Bear Stearns, Lehman Brothers, Merrill Lynch, and Citibank. Nor was there any effort to curb the use of structured investment vehicles (SIVs), toxic instruments which are often used as the final packaging of a mass of CDOs and other kited derivatives. Still, since credit default swaps had been the main culprits in the bankruptcy of AIG, costing the American taxpayer $182 billion and counting, it would have been a meritorious project to keep commercial banks away from these diabolical instruments.

But it was not to be. In a dirty deal negotiated far away from the C-SPAN cameras, Dodd, Frank, and Rahm Emanuel completely gutted any effort to get commercial banks out of the business of placing side bets using credit default swaps. At a certain point in the televised reconciliation hearings, Congressman Peterson of Minnesota, the chairman of the House Agriculture Committee, came forward with a compromise which made paragraph 716 into a macabre joke. The infamous Peterson demanded that banks be allowed to trade credit default swaps in the form of foreign exchange swaps ( thought to be the largest category of swaps), interest-rate swaps, and credit derivatives – provided that the underlying securities were investment-grade. Since these categories represent the vast majority of swaps, and since it is not hard to procure an investment grade rating on junk paper from corrupt agencies like Standard & Poor’s, Fitch, and Moody’s, this alleged compromise meant that nothing was left of Senator Lincoln’s attempt. Treasury Secretary Tiny Tim Geithner had vehemently proclaimed the irreducible hostility of the Obama regime to any interference with this type of derivative. Interestingly, the German government had already explicitly banned naked credit default swaps issued as bets on government securities denominated in euros.

Since the restoration of the real Glass-Steagall firewall had been defeated early in the process, Senator Cantwell attempted to provide a weak face-saving substitute in the form of the so-called Volcker rule, which posited that commercial banks were not allowed to engage in speculation and other proprietary trading for their own account. This Volcker rule was already vitiated by the obvious gray area between speculation and so-called market-making, which entities like Goldman Sachs and Morgan Stanley were sure to exploit to circumvent any new legislation. However, zombie banks like State Street Bank and Bank of New York-Mellon (the latter the back-office of the TARP program. i.e. the October 2008 Wall Street bailout) found even the weak Volcker rule to be too onerous.

Demagogue Scott Brown Drives His Truck Through the Volcker Rule

Senator Scott Brown of Massachusetts won election last January by duping gullible voters with a cultural populist prop in the form of a pickup truck. At this point in the haggling, Senator Brown documented his subservience to Wall Street by driving his truck through what remained of the Volcker role. He forced through a provision allowing commercial banks to use 3% of their capital for speculation through hedge funds. It might seem that 3% is a minute fraction of a bank’s Tier I capital, and that Brown’s amendment might not be so dangerous after all. But this is not the case.

If you buy stocks and their price falls to zero, you can lose 100% of your investment, but no more. But when you are dealing with derivatives, your losses can be geometrically pyramided into interplanetary space. This proposition is not a matter of theory, but has been documented through a decade and a half of bankruptcies by hedge funds which had been speculating with derivatives, all the way back to Long-Term Capital Management of Connecticut in 1998….

www.infowars.com/obama-dodd-frank-finreg-monstrosity-delays-derivatives-curbs-until-2022/

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