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I haven't posted anything in a while, so if I break some long standing no-no rule you have my apologies in advance. But I just read an article at Mother Jones that was so disturbing I felt the need to inform the KOS community about it.

The MJ article outlines how four senators, Randy Hultgren (R-Ill.), Jim Himes (D-Conn.), Richard Hudson (R-NC), and Sean Patrick Mahoney (D-NY) have sponsored a bill (Swaps Regulatory Improvement Act) that would permit banks like Citigroup to insure their derivatives with FDIC insurance. For the record, the US government doesn’t contribute to the FDIC. The FDIC receives funding from premiums paid by private financial institutions and interest on Treasury bonds.  But here’s the rub. As of 2008 US financial institutions maintained about 70 TRILLION dollars in derivatives.  If the economy were to implode again as it did in 2008 there wouldn’t be enough money on planet earth, let alone in FDIC coffers to cover the money that would be lost in derivatives.  

Second, derivatives ARE NOT money; they are “bets” whose “value” fluctuates along with the thing they are betting on. For example, the 2008 housing crisis could be more accurately defined as the “2008 Housing Derivative” crisis. If just the cost of homes had imploded, it’s estimated the market would have lost about a trillion dollars. But the fact that mortgages were repackaged as derivatives/securities (read “bets”) meant that banks and investors had placed bets to the tune of 70 TRILLION dollars on a couple of trillion worth of homes. Hence when the market crashed, not only did home prices implode but so did 70 trillion worth of bets that couldn’t be paid off with insurance money because there wasn’t enough to do so. THAT’s why the recession was so deep and long lasting. Since financial institutions had added the value of their bets/derivatives to their bottom line, they essentially went broke.  Please stay with me.

 I’m sure most of you are aware that the primary reason we got into the mess we did in 2008 was because the provisions of the Glass-Steagall Act, established during the Great Depression, which forbade commercial and investment banks from using each other’s money, were eliminated in 1999 by the Financial Services Modernization Act, aka the Graham, Leach, Bliley Act (after the three GOP idiots that introduced it).  To the best of my knowledge the GOP refused to allow Glass-Steagall to be part of the financial reforms initiated by the Obama Administration.  Hence the Achilles Heel of the financial markets is still alive, well and festering.

This is what makes the new “Swaps Regulatory Improvement Act” so bad. Not only do financial institutions want to insure their bets (again)with real money, but NOTHING substantive  has been done to prevent the financial markets from recreating the financial scenario that lead up to the 2008 crash.  In short if the market destroys itself again, the FDIC will go bankrupt trying to stave off a new wave of bank insolvencies, and that means YOU AND I will get stuck bailing them out AGAIN. But since the FDIC also insures OUR deposits they will likely be wiped out along with everyone else’s. Welcome back to the 1930’s.

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Comment Preferences

  •  Tip Jar (14+ / 0-)

    No being has inherent power, only the illusion of power granted by others who similarly have none.

    by Mark701 on Wed May 29, 2013 at 08:54:12 AM PDT

  •  Small correction (2+ / 0-)
    Recommended by:
    commonmass, FarWestGirl

    to this otherwise important diary. The legislators in question are Congressmen, not Senators.

    Barack Obama for President

    by looty on Wed May 29, 2013 at 09:00:56 AM PDT

  •  Please clarify- (1+ / 0-)
    Recommended by:

    You said the FDIC was funded partially by "interest on Treasury bonds"

    Who owns the bonds? The banks? The banks that we lend money to at zero percent so they can buy bonds and loan the zero percent money back to us at a profit?

    If that is the case, then taxpayers definitely ARE funding the FDIC through the Free Money For Rich Guys Program that is run by Ben Bernanke and the Fed.

    Derivatives are bets and should be illegal in any responsible system of finance. They should be handled in off-shore casinos and cruise boats and if these high roller banksters take an occasional bath, they should enjoy the tub alone.

    This is just one more instance of "privatizing the gain but socializing the losses" that runs our system.

    And nice phoney name the Congressman thought up.

    “Human kindness has never weakened the stamina or softened the fiber of a free people. A nation does not have to be cruel to be tough.” FDR

    by Phoebe Loosinhouse on Wed May 29, 2013 at 09:59:51 AM PDT

  •  If this is true, rec this up, Kossacks. n/t (0+ / 0-)

    I resent that. I demand snark, and overly so -- Markos Moulitsas.

    by commonmass on Wed May 29, 2013 at 11:12:36 AM PDT

    •  It's not. (4+ / 0-)
      Recommended by:
      eparrot, VClib, FarWestGirl, nextstep

      The FDIC coverage is on deposits inside of banks up to $100K or whatever the limit is these days.  The rule would permit those banks to hold derivatives.  There's an argument that there's a sort of indirect subsidization (insured deposits = cheaper cost of capital which can permit the bank to use cheaper capital to make loans, buy derivatives, whatever), but the derivatives aren't being directly insured.

      •  exactly (2+ / 0-)
        Recommended by:
        VClib, FarWestGirl

        it's true that this proposal is a very bad idea because it allows FDIC insured banks to take much bigger risks than we want them to take, increasing the likelihood of the FDIC needing to be called on. But it's only the insured deposits that would need to be paid, not whatever the notional value of their derivatives.

        Want a progressive global warming novel, not a right wing rant? Go to and check out New World Orders

        by eparrot on Wed May 29, 2013 at 12:42:36 PM PDT

        [ Parent ]

      •  Bullshit...derivatives ARE insured by the U.S.... (2+ / 0-)
        Recommended by:
        Roger Fox, FarWestGirl

        ...government, not just in the United States, but whenever a U.S. bank enters into a trade anywhere on the planet. Furthermore, the primary derivatives exchanges--which are also owned outright by the large derivatives players here in the U.S. and in Europe--are ALSO backstopped by our government.

        The TBTF and other organizations, such as the major derivatives exchanges are all designated as "Systemically Important," by the FSOC. They're supported by the "full faith and credit of the United States government." As for us taxpayers, these days we're obviously not considered "systemically important." And, therein lies the rub.

        This is all manged under the Dodd Frank-created FSOC (Financlal Stability Oversight Council).

        Then, you have a handful of trolls running around DKos feebly attempting to disinform the community that this isn't the case.

        But, didn't your mother warn you about blogging with people like that?

        As a sidebar, when the FDIC backstops ANYTHING in our country, in THEORY, the banks are supposed to pay for those backstops with increased funds being tithed (by the FDIC via) by the government upon those financial institutions. The reality, however, in the past couple of decades, is that the banks aren't that great at quickly paying down these imposed fees. And, in the case of a derivatives market failure....well, we've already seen how that works out, haven't we?

        When the FDIC runs out of funds...of course, you have two guesses where that Dept. of Treasury-managed organizations gets more funds, and the first guess--the tooth fairy--is incorrect.

        "I always thought if you worked hard enough and tried hard enough, things would work out. I was wrong." --Katharine Graham

        by bobswern on Wed May 29, 2013 at 02:53:50 PM PDT

        [ Parent ]

        •  Addtional information (0+ / 0-)

          From the article:

          "The bill, called the Swaps Regulatory Improvement Act, was approved by the House financial services committee in May and is headed for a vote on the House floor soon. It would gut a section of the 2010 Dodd-Frank financial reform act called the "push-out rule." Banks hate the push-out rule, which is scheduled to go into effect on July 13, because this provision will forbid them from trading certain derivatives (which are complicated financial instruments with values derived from underlying variables, such as crop prices or interest rates). Under this rule, banks will have to move these risky trades into separate non-bank affiliates that aren't insured by the Federal Deposit Insurance Corporation (FDIC) and are less likely to receive government bailouts."

          In essence, banks are being prevented from insuring certain derivatives by the existing language in Dodd-Frank. Subsequently the banks want to gut Dodd Frank and allow these derivatives to be explicitly insured by the FDIC, which is what the SRIA would do.

          Whereas, as you say,  the big banks are "backstopped" by the US government, they're apparently concerned that the US government is refusing to insure some of their derivatives.  Hence the motivation for the bill.

          That said, my reason for posting this information was simply to inform and learn. That doesn't make me a troll so there's no need to get rude in your comment. Peace.

          No being has inherent power, only the illusion of power granted by others who similarly have none.

          by Mark701 on Wed May 29, 2013 at 04:57:34 PM PDT

          [ Parent ]

          •  Mark701, my comment was NOT in response... (0+ / 0-)

   your comment(s), at all.

            "I always thought if you worked hard enough and tried hard enough, things would work out. I was wrong." --Katharine Graham

            by bobswern on Wed May 29, 2013 at 06:29:37 PM PDT

            [ Parent ]

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