Disarming Financial Weapons Of Mass Destruction

Remember those crazy casino style multi-billion dollar bets called credit derivatives and credit default swaps that AIG, Lehman Brothers, Goldman Sachs, etc. took out? The ones that guru investor Warren Buffet rightly called “weapons of mass financial destruction” because they brought our entire economy to the brink of collapse?

Thankfully, Congress is finally doing something about them. Both the House and Senate are debating a bill called the Over the Counter Derivatives Market Act of 2009. The bill would require derivatives to be traded through a transparent clearinghouse. That way everyone can know the size of the bets being placed and that both parties have enough collateral to pay up if their bet goes the wrong way.

This simple reform makes a world of sense, but there’s one minor problem. Guess who wants to own the new clearinghouse? You guessed it, the exact same giant financial institutions who created the whole mess in the first place. As Daniel Hemel notes in an excellent Slate piece, “The Foxes Guard the Financial Henhouse“:

Now imagine the uproar if Obama actually allowed Goldman, rather than its ex-employees, to regulate risk in the financial markets. And yet the administration and its allies in Congress are poised to do just that. The awkwardly named Over-the-Counter Derivatives Markets Act of 2009 would give Goldman and eight other big banks a government-guaranteed oligopoly over the market for credit-default swaps—with a license to set the rules of the road. In effect, the bill would allow a cartel to control trillions of dollars in transactions that entail enormous risk to the financial system as a whole.

Fortunately, there’s a simple way to solve this problem. Limit the ability of any one financial institution to own and manipulate the whole clearinghouse. And that’s exactly what Massachusetts Rep. Stephen Lynch is proposing. His straightforward amendment would prevent anyone from owning more than 20 percent of a clearinghouse.

The Lynch amendment should be included in both the House and Senate financial reform bills. And fortunately for us in Rhode Island, our senior U.S. Senator Jack Reed sits on the powerful Senate Banking Committee. Here’s hoping he introduces similar common sense language so the big banks don’t take us for another ride with a “reformed” derivatives market that they own!

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