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Federal Reserve, About To Be Given More Power, Works To Protect Bank Profits

There may be no greater argument for why you wouldn’t want to invest more power in the Federal Reserve to monitor the financial sector than this tidbit:

The banks, of course, aren’t big on Blanche Lincoln’s idea to spin derivatives-trading desks out of the banks. Particularly the big banks, which as you can in the graphic atop this post, pretty much control the market. But it turns out the Federal Reserve is on their side. According to the Wall Street Journal, “the Federal Reserve over the weekend tried to kill the provision,” sending lawmakers a letter saying the idea should be “deleted” from the bill. But as it is, the idea actually appears to be gaining ground, moving from some weird regulation that Lincoln proposed and nobody expected to part of the actual bill.

It’s positive that this part of the deal appears to be moving forward, though it’s entirely possible that it’s a bargaining chip.

But let’s be clear about this. There’s one reason for investment banks to keep their derivatives trading desks: they are extremely lucrative money-makers. They have a monopoly on the market. It’s not like some entrepreneur is going to become a mom-and-pop derivative shop and drive down rates for structuring the deals, but having the swaps desks located at the big investment firms creates the very kinds of conflicts of interest that we’re seeing come up in the Goldman Sachs hearing. If there were a good reason not to spin off the desks, I haven’t heard it – the one getting floated is that the banks have the faith of the investors and the derivatives market would otherwise collapse, a point with which I don’t agree (especially if there are central clearinghouses), but to which I also say: So? What social utility does a $680 trillion dollar derivatives market provide?

But the key point is that the Fed has tried to step in on behalf of the biggest banks into a legislative priority. And the bill on offer from Chris Dodd would give the Fed a lot of authority over monitoring systemic risk. Do you really think that the same organization trying to protect bank profits in this case is going to be terribly concerned about, well, anything else?

I’m aware of the broad coalition around auditing the Fed in the Senate, and basically accountability and transparency around them. And who knows, Sanders may get that. But the very structure of the Dodd bill empowers an organization that is almost perfectly aligned with the banks. And they would be among the chief regulators.

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David Dayen

David Dayen