Support Marketplace

Will banks continue derivative dealing?

Senate Banking Chairman Chris Dodd (D-CT)

TEXT OF STORY

Kai Ryssdal: It's probably more accurate to call all the bank lobbying that's going on in Washington this week intense rather than frantic. But there is a whole lot on the line. American banks are trying like heck to hang on to their share of the derivatives market. Those things like credit default swaps that did so much to make the credit crisis so much worse.

Derivatives are worth more than $200 trillion to the entire financial industry. And there is some buzz today that all their pressure is working. Both Christopher Dodd, who chairs the Senate Banking Committee, and Arkansas' Blanche Lincoln, who heads the Agriculture Committee, say there's room to negotiate.

Our senior business correspondent Bob Moon has more.


Bob Moon: Just a few weeks ago, Senator Lincoln declared that banks backed with taxpayer guarantees shouldn't be allowed to wager at all in financial derivatives.

Senator Blanche Lincoln: This is no time for small fixes or tweaking around the edges -- this is the time for bold change and big decisions.

Since then, the secretary of the Treasury, the head of the Federal Reserve and the country's top banking regulator have lined up against her proposal. And now she's open to some tweaking.

Robert Kuttner is a senior fellow at the advocacy group Demos. He says Lincoln's plan would give banks that want to keep trading in the lucrative but risky market a choice: Do it if you want, but without any promise of a bail out from Uncle Sam.

Robert Kuttner: You are either a commercial bank with taxpayer guarantees, or you are an investment bank risking your own money. That's a nice, clear, bright line. If you depart too much from that, then the wise guys always find some way around it.

Derivatives were first devised as a way of insuring against unexpected losses on an investment. But Kuttner says many banks have made a lot of money wagering on things in which they haven't actually invested. He says it amounts to taking insurance out on your neighbor's home.

Opponents argue that not all derivatives are bad -- and that the business actually makes the banks stronger, and thus more able to lend. Scott Talbott is chief lobbyist for the Financial Services Roundtable.

Scott Talbott: Many people point to AIG, which is not a bank, which did not accept deposits, as being a leading cause. So to say we shouldn't allow banks to engage in derivative activity simply because another player did not use derivatives well, seems to be throwing the baby out with the bathwater.

Democratic leaders aren't saying where they might be open to compromise. Talbott's been pushing for what he calls a "more elegant" measure. It would require banks to keep more cash on hand to cover possible losses.

The debate on financial regulatory reform is entering its final week.

I'm Bob Moon for Marketplace.

About the author

Bob Moon is Marketplace’s senior business correspondent, based in Los Angeles.

Comments

I agree to American Public Media's Terms and Conditions.
With Generous Support From...