The House-Senate compromise bill on overhauling regulations on banks and other financial institutions was passed today at 5:40 AM. Two years after the American economy began to collapse, lawmakers began their negotiations in front of C-Span cameras on Thursday morning, but ended them behind closed doors on Friday. So much for transparency.
During the collapse, the Dow Jones Industrial Average fell from a high of just over 14,066 to 6,626, a nearly 53% drop in less than a year. Unemployment skyrocketed to nearly eleven percent. The Housing Bubble, coupled with Credit Default swaps and other risky derivatives betting left America’s banks unable to meet Federal requirements for Capital on hand, creating the need for a massive Wall Street bailout to "prevent the American economy from collapsing".
With all of that in mind, Congress and the Senate negotiated the strongest parts of the reform bill away. Credit Default swaps are here to stay. Banks can still play in the derivatives market, and still have Federal cash available to bail them out from a series of bad bets. In layman’s terms, the banks money (investor money) is backed by the Fed. The bank is still allowed to use that Fed backed investor money to trade in derivatives related to interest rates, foreign exchanges, gold and silver, the largest and most profitable portion of their derivatives trading already. If the bank’s bet on those derivatives is bad, they have the Fed to fall back on to make their bets good. That’s called a bailout, but because of the oversight and transparency rules in the bill, the bailouts will be smaller and happen more frequently.
There are some strong changes in the bill, but regulation on the major items most taxpayers were concerned about, like bailouts and Credit Default swaps, were either watered down or left alone completely. That Credit Default swaps are still in existence at all is a point that amazes me, as an investor. That one instrument created a domino effect that collapsed our economy. Nearly two years after AIG and our biggest banks went hat in hand to the Fed, unemployment rates are still near ten percent, and the Dow Jones, which never regained what it had lost to begin with, is on the way back down again. Consumer confidence is low, banks are not lending to small businesses, and businesses are not hiring.
Yet our senators and congresspeople found nothing inherently wrong with a derivative that toppled our economic system. And, our senators and congresspeople want you to believe that all of the money Wall Street and our largest banks give to them do not create a conflict of interest or influence the way they write legislation. ?