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Senate takes up derivatives trading

Jennifer Collins Apr 21, 2010
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Bill Radke: Those tricky investments called derivatives have gotten a bad rap lately, and today they’re the focus of a Senate committee hearing. Now derivatives are basically deals that let people trade almost anything, from wheat futures to home loans. Some derivatives trades have been blamed for at least part
of the financial meltdown, thus today’s Senate hearing, as Marketplace’s Jennifer Collins reports.


Jennifer Collins: Senator Chris Dodd has a plan: Bring derivatives out into the open. The Democratic lawmaker has introduced legislation that would require these complex instruments to be traded on a public exchange. Barbara Matthews is a regulatory consultant:

Barbara Matthews: The exchange trading basically will funnel all activity into a standard format and so the price of that trading will be visible to anyone who has an interest.

Like you might see on the New York Stock Exchange. But some people think regular banks shouldn’t trade these risky instruments. That includes Democratic Senator Blanche Lincoln. She introduced her own legislation:

Blance LINCOLN: It means that if you’re going to be a bank and you want to be a bank, then you need to be a bank and you need to spin off the risky activity that exists out there.

The bill would essentially make it nearly impossible for banks with insured deposits to engage risky derivatives trading.

Mike KONCZAL: We have FDIC insurance which makes sure that, you know, people are protected.

Mike Konczal is a research fellow with the Roosevelt Institute:

KONCZAL: What we don’t want is that insurance to be used to run a casino. That’s what Senator Lincoln’s language does.

And the hope is this legislation could help prevent another financial crisis. Regulatory consultant Barbara Matthews says if the crisis is big enough:

MATTHEWS: I tend to believe that irrespective of what the law says, the government would step in anyway.

Today, lawmakers may begin to explore a compromise between Dodd and Lincoln’s bills.

I’m Jennifer Collins for Marketplace.

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