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Protecting taxpayers from derivatives

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Tess Vigeland: The Senate is still wrestling over key aspects of the financial overhaul bill that Democratic leaders are hoping to pass by the holiday recess. The latest fight is over the regulation of complex derivatives that helped get us into the financial crisis. So, what’s in the bill now that assures us we won’t get into trouble again?

Here’s Marketplace’s Nancy Marshall Genzer.

Nancy Marshall Genzer: The Senate spent much of today doing the dance of the derivatives. Banks use these complex investments to hedge risk, but derivatives themselves can be risky. Now the question is: Should banks be barred from these investments?

Senate Banking Committee Chairman Chris Dodd offered this: Create a new council of regulators to decide the question in two years. But then, Dodd decided not to bring that up for a vote. But a provision from Arkansas Democrat Blanche Lincoln is in the bill. It would force banks to spin off their derivatives operations into separate companies.

Michael Greenberger teaches law at the University of Maryland. He advised Lincoln’s staff.

Michael Greenberger: To the extent the banks want to open a casino, they’re on their own. The American taxpayer is not going to be the lender of last resort.

Bankers say, don’t keep us away from derivatives. Just make us keep more cash on hand, so we can bail ourselves out.

Scott Talbott is chief lobbyist for the Financial Services Roundtable.

Scott Talbott: Simple concept. Save for a rainy day. Set aside some capital to account for any risk.

Actually, the Senate bill does tackle that idea. It forces all financial institutions regulated by the Federal Reserve to set aside more money. One amendment would go even further. It would restore a law from the 1930s, and separate commercial and investment banking. Commercial banks take deposits backed by the FDIC and make loans. Investment banks make deals for clients and can invest in risky ventures.

Tim Fernholz is a fellow with the New America Foundation. He says right now, banks’ investment arms get taxpayer protection.

Tim Fernholz: They have any number of riskier banking activities that, if something goes wrong on that side, the government is going to be on the hook to protect the commercial bank.

Government, meaning we, the taxpayers.

In Washington, I’m Nancy Marshall Genzer for Marketplace.

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