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Banks Get OK to Use Taxpayer Money for Derivative Speculation

Banks Get OK to Use Taxpayer Money for Derivative Speculation


Politicians share many of the same skills as magicians. They both use psychological misdirection by making big gestures to distract and fixate spectators, while quietly performing their tricks. 

A good example of this is the House and Senate agreeing to raise the budgets for the Commodities Futures Trading Commission and Securities & Exchange Commission in exchange for quietly repealing the Lincoln Amendment to the Dodd Frank financial regulation law. The action looks like more money for tougher regulation, but eliminating the Lincoln Amendment means American banks are once again free to use taxpayer money to back-stop their speculative derivative trading.


Involving government with financial institutions and derivatives has a very nasty history in the United States. It has been 20 years since Orange County, California filed for bankruptcy after losing $2.7 billion from derivatives; 16 years since Long Term Capital Management threatened America’s largest banks with $1 trillion in default risks; and 6 years since AIG’s $14.5 billion defaulted margin call on $20 trillion in derivatives almost wiped out the U.S. banking system and forced taxpayers to fund an $85 billion bailout.

Following the 2008 financial crisis, Congress passed the Dodd Frank Act to strengthen regulation of financial institutions. A key regulatory element was the “Lincoln Amendment” rule. Starting in 2013, federally insured banks would be prohibited from directly engaging in derivative transactions not specifically hedging (1) lending risks, (2) interest rate volatility, and (3) cushion against credit defaults. The “push-out rule” sought to force banks to move their speculative trading into non-federally insured subsidiaries.

The Federal Reserve and Office of the Comptroller of the Currency in 2013 allowed a two-year delay on the condition that banks take steps to move swaps to subsidiaries that don’t benefit from federal deposit insurance or borrowing directly from the Fed.

The rule would have impacted the $280 trillion in derivatives primarily held by the “too-big-to-fail (TBTF) banks that include JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo. Although 95% of TBTF derivative holdings are exempt as legitimate lending hedges, leveraging cheap money from the U.S. Federal Reserve into $10 trillion of derivative speculation is one of the TBTF banks’ most profitable business activities.

As psychological misdirection, a bipartisan rogues gallery of House and Senate members are praising the improved financial regulation that will supposedly result from an annual $35 million increase in the Commodity Futures Trading Commission budget to $250 million and $150 million increase in the Securities and Exchange Commission to $1.5 billion. But buried deep in the 1,600 pages of the $1.1 trillion House year-end spending bill, the Lincoln Amendment is terminated.

With the public distracted and fixated on the huge spending bill and the federal bureaucracy getting $185 million to hire lots of new regulators, the TBTF banks quietly retain unfettered access to speculate in derivatives with taxpayer money. It is just magic!

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