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HuffPo's Shahien Nasiripour obtained an e-mail sent to the Senate Banking Committee by Americans for Financial Reform, alerting them to a major loophole, "wide enough to undermine the whole effort to reform a part of the financial market -- those derivatives traded between financial firms, like AIG, outside of any government oversight -- that's largely blamed for worsening the financial crisis."

The financial regulatory reform legislation, which is being shepherded through the Senate by Banking Committee Chairman Christopher Dodd (D-Conn.), attempts to rein in the OTC derivatives market by mandating that most trades go through a clearinghouse, a facility that executes trades for parties that are required to post collateral and mark their positions daily to prevailing market prices. So, rather than two financial firms trading with each other -- with no oversight -- they'd now have to go through this central point. It would shed more light on the market and allow for government regulators to more effectively police it, reformers and Obama administration officials argue.

Standard contracts and those not involving so-called "commercial end users" -- firms like Coca-Cola and General Electric that use derivatives as insurance against currency and interest-rate fluctuations, for example -- will be required to go through these clearinghouses.

The problem, however, is that there's apparently little consequence if firms evade the requirements, according to the email sent to a Banking Committee staffer by Americans for Financial Reform, an umbrella organization of consumer advocacy, public affairs and union groups arguing for reform. Some of these potential loopholes were first identified by Zach Carter of AlterNet.

"[T]here is no consequence for counterparties who enter into uncleared swaps even after a finding by the [Commodity Futures Trading Commission] or [Securities and Exchange Commission] that the swaps must be cleared," the email reads. The bill "does not prohibit the use of uncleared swaps and, even more egregious, expressly states that no swap can be voided for failure to clear."

In other words, if parties to a swaps contract -- a type of derivative that involves regular payments over a specified time period -- do not trade via a clearinghouse when they're supposed to, there's no penalty, the group argues. Also, those swaps can't be deemed invalid because of this evasion.

Furthermore, the email points out, even though federal regulators may require that a swap be cleared, they can't mandate a clearinghouse to accept it....

Lincoln's staff is "willing to get this serious loophole blocked," according to person familiar with the negotiations. The Senate Banking Committee "will have to agree with Senate Agriculture's willingness to see this loophole blocked," the source added.

There's potential for this language to be tightened up prior to the final vote on the bill, or (less likely) in conference. Much, very much, depends on what happens in tomorrow's primary election in Arkansas. Lincoln's derivatives reform already goes too far for the White House, Paul Volker, the FDIC, Chris Dodd and plenty of other Dems. But with the tough reform seen as critical to her re-election bid in this close primary, they've all agreed to postpone gutting it. It's very likely to be watered down in conference, unless Blanche Lincoln is still in her primary in a run-off. If she loses outright tomorrow, there's nothing to save her reforms. If she wins outright tomorrow, she won't care as much about having these strong reforms to appeal to the left, though would still be vulnerable to hypocrisy charges from her Republican opponent.

What that all means is that it's looking unlikely that this loophole is going to be closed.

Originally posted to Daily Kos on Mon May 17, 2010 at 02:00 PM PDT.

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Comment Preferences

  •  Great, GIGANTIC loophole and needs 60+ votes (0+ / 0-)

    Will this a) get past the Senate and b) do any good?

    Happy little moron, Lucky little man.
    I wish I was a moron, MY GOD, Perhaps I am!
    -Spike Milligan

    by polecat on Mon May 17, 2010 at 02:01:12 PM PDT

    •  Dodd will push hard for this, after all (1+ / 0-)
      Recommended by:

      His wife is on the board of CME, the company that will likely dominate the clearinghouse market - and they get hundreds of thousands of dollars from her being on the board.

      Is this a case where corruption was coincident with the public interest?

      The most important way to protect the environment is not to have more than one child.

      by nextstep on Mon May 17, 2010 at 03:39:05 PM PDT

      [ Parent ]

  •  McJoan -- why'd you change your Nom de Guerre? /n (0+ / 0-)

    Happy little moron, Lucky little man.
    I wish I was a moron, MY GOD, Perhaps I am!
    -Spike Milligan

    by polecat on Mon May 17, 2010 at 02:01:59 PM PDT

  •  Just like HCR, the final product may be flawed... (1+ / 0-)
    Recommended by:

    but it lays the foundation upon which to build a better regulatory framework in the future. Pass the dang bill; we'll perfect it later.

    Groucho Marx sings the new GOP motto: I'm Against It!

    by Jimdotz on Mon May 17, 2010 at 02:02:39 PM PDT

  •  Even if there wasn't a loophole (1+ / 0-)
    Recommended by:
    Wall Street would figure out a way to create one.  Tighten it up, and it needs to be review often - too many "clever" people in the money game....unfortunately, a lot more clever than legislators.

    The care of human life and happiness, and not their destruction, is the first and only legitimate object of good government. - Thomas Jefferson

    by ctexrep on Mon May 17, 2010 at 02:03:46 PM PDT

  •  I think (3+ / 0-)
    Recommended by:
    El Zmuenga, vacantlook, cybrestrike

    by "loophole" you mean "feature".

    Then again, I'm cynical and bitter. Look on the bright side - it's not like these guys just, within recent memory, came within sixty days of utterly destroying the economy or anything.

    Are you on the Wreck List? Horde on Garrosh.

    by Moody Loner on Mon May 17, 2010 at 02:06:38 PM PDT

  •  more damn regulatory tail-chasing -what next? n/t (0+ / 0-)

    "...calling for a 5" deck gun is not parody. Not by a long shot." (gnaborretni)

    by annieli on Mon May 17, 2010 at 02:06:45 PM PDT

  •  Lincoln Ammendment not the key to reform (2+ / 0-)
    Recommended by:
    PsychoSavannah, Phil S 33

    It's important to realize there are a number of different items being discussed here, some of which are critical for real reform, and some of which aren't.

    The loophole being discussed here clearly is crucial, as is Merkley's amendment codifying the 'Volker rule', as is Dorgan's amendment on naked swaps. Dodd needs to stop being a corporate whore and aggressively support this stuff.

    Lincoln's language making banks spin off their derivatives business entirely, isn't necessary if they can't trade on their own behalf, only on behalf of their clients.

    •  There is no one "key" (0+ / 0-)

      ...but the Lincoln provision is probably the biggest battle we face. If there is in fact a loophole as suggested, and I have no reason to doubt it, there is reason to believe they will fix it before the process is done. It appears to be a technical issue.

      The Lincoln provision is NOT a technical issue. There are big interests trying to scrap it while progressive economists say it is good. Merkley's amendment is also very important and good but the Lincoln provision is too.

      •  If there's one key, it's Merkley-Levin (0+ / 0-)

        I'll probably diary it, because it's so huge, and I think it's being missed, but this amendment, the Merkley-Levin amendment, which will outlaw proprietary trading in derivatives, is the most important thing in the whole bill, and the thing bankers and Republicans are lining up to fight. Call your congressman on this one.

  •  Wow... (1+ / 0-)
    Recommended by:
    Phil S 33

    why am I not shocked?

  •  speed trading (3+ / 0-)
    Recommended by:
    PsychoSavannah, Tuba Les, Jim P

    Not exactly sure what this is, but I believe a good portion of trading volume is just the moving in and out of positions in less than 10 seconds.  This was a probable contributor to the flash crash and should be included before the next crash lasts longer than a flash.  Putting a fee onto trades that result in positions of less than one minute seems sensible.

  •  ...And the beat goes on. (0+ / 0-)

    This is all fucking pointless.  

    The United States: A wholly owned subsidiary of British Petroleum.

    by Beelzebud on Mon May 17, 2010 at 02:14:37 PM PDT

  •  Why should we believe that REAL reform is (0+ / 0-)

    going to happen?   Because they say so???

    And the moon is made of green chesse, too.....

    C'mon the Wall street lobbyists wrote this thing, and that means, no serious reform!!


    Lincoln Open to Selling Out on Derivatives, She Says

    Robert Reich calls this the "biggest battle of bank reform." CALL THE SENATE BANKING COMMITTEE. Phone numbers listed in the diary. There is not much time!

  •  And Obama is doing a robocall for Lincoln (2+ / 0-)
    Recommended by:
    El Zmuenga, Othniel Kenaz

    claiming she's fighting Wall Street.

    BIG whoppers by Obama about Senator Lincoln:

       Blanche is leading the fight to hold Wall Street accountable. She's standing on the side of workers who lost their jobs in this recession by extending unemployment insurance payments. On health care, Blanche took on big insurance companies by voting to end discrimination against Arkansans with preexisting conditions.

    Join Our Countdown To Health Reform! Project I work with Progressive Congress Action Fund, a 501(c)4.

    by slinkerwink on Mon May 17, 2010 at 02:18:10 PM PDT

  •  I'm at a loss... (0+ / 0-)

    Lincoln's derivatives reform already goes too far for the White House, Paul Volker, the FDIC, Chris Dodd and plenty of other Dem

    . . .in this politicking equation, which are the "More Dems" and which are the "Better Dems"?  

    Is there a dkos decoder ring somewhere?

    Maybe it's time to ditch the (inapplicable) progressive framework and adopt a more realistic schema:

    "Stooge Dems" and . . .

    . . .

    uh. . .

    Please don't feed the security state.

    •  Seriously. (0+ / 0-)

      First we had HC'r'.  

      (Well, HC'r' was actually second -- first was a half-hearted feint at Fascism'r'.)

      So now we'll get F'r' on demand, once again amounting to a corporate rear-guard action, spitting in the face of latent hope and change, brought to you, once again, by our energetic, pragmatic politicking Democratic Leaders and their fulltime politicking apologists.

      Next up, immigration'r'.  Maybe some sort of eco'r'.  Then these chumps will have served their purpose, played out the clock.

      Then we'll call it politics.

      Please don't feed the security state.

  •  This whole thing is a joke (0+ / 0-)

    and really accomplishes nothing. It's all window dressing and makes no difference if it passes or not.

  •  More Voluntary Industry Compliance (0+ / 0-)

    So this "reform" is optional. If banks don't want to follow the rules, it allows them to do it however they want.

    Obama is better than Bush, who was cataclysmically bad.But he's not good enough. And the Democratic Congress, though not as bad as that hellhole the Republicans ran, is bad enough.

    The banking industry is going to crash itself, and us with it, again. Soon. Without any more reserves left to bail us out.

    Brace yourself.

    "When the going gets weird, the weird turn pro." - HST

    by DocGonzo on Mon May 17, 2010 at 02:48:00 PM PDT

  •  Rinse. Wash. (0+ / 0-)

    More and Better Democrats

    by SJerseyIndy on Mon May 17, 2010 at 05:00:06 PM PDT

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