Derivatives are what brought down AIG. A decade earlier they caused the Long-Term Capital Management fiasco. Warren Buffet called them "financial weapons of mass destruction."

But now in what Robert Reich calls the "biggest battle in bank reform," bankers are hysterical over a Senate provision stopping banks that trade derivatives from receiving FDIC deposit insurance, loans from the Fed and other forms of government assistance.

The banksters are lobbying hard for their ability to get bailed out after making these risky transactions. Many are so risky that Joseph Stiglitz describes them as gambling.

This arrangement is economically inefficient — firms should pay for the costs of their insurance. If the government guarantee is removed, the banks might have to put more money into their derivatives subsidiaries. This will reduce the banks’ profitability, and it might force up prices of this "insurance." But that is as it should be. The government shouldn’t be subsidizing "insurance" — and it certainly shouldn’t be in the business of subsidizing gambling.

In this debate we see a bizarre role reversal: the establishment is fighting for more government subsidies under the guise of decreased regulation and the leftists are fighting for the free market. So much for the term "market fundamentalism." It’s completely remarkable and astonishing that the banks have been able to make this switch without being booed and heckled, let alone no one even noticing.

Dimon and friends are careful to use cushy language:

"With the events in Europe and constantly changing proposals in Washington, global markets are in need of certainty," said Jaime Dimon, president and chief executive officer of JPMorgan Chase & Co. "The U.S. should take the approach of passing sensible derivatives reforms based on facts and analysis. I am hopeful our legislators will take a responsible path and avoid actions that will disrupt markets and force these products into unregulated entities."

In fact derivatives dealers would be well regulated under the bill. Among other requirements, they would still need to clear all trades on a central clearinghouse where information would be publicly available. There is a whole section called Title VII detailing regulator jurisdiction and requirements for firms trading these products.

In reality, what Dimon and many other officials mean by "unregulated" is unsubsidized. They feel that the federal government must step in and subsidize derivatives or all hell will break loose. Without the subsidy, they imply, US banks won’t be able to compete with foreign banks. Our financial system will be destabilized. Derivatives are said to be essential to normal banking operations, even though the top five banks control 90% of the swaps market.

Not only do banksters have the audacity to demand we subsidize their most risky trades, they are now feeling "betrayed" with Democrats and President Obama over the mere threat of stopping the subsidies.

Obama also became close with Jamie Dimon, chief executive of JPMorgan Chase. That relationship has been strained, though, and Dimon has increasingly voiced his unhappiness with rhetoric and policy out of Washington.

More recently, Dimon went on the record criticizing the way derivatives were handled in the Senate, arguing that the chaotic process added to the market’s wild swings.

Congressional Democrats and the party committees that support their campaigns are already suffering from Wall Street’s sense of betrayal. According to a center study done for RealClearPolitics, Republicans collected about three-quarters of the political contributions from New York financial services companies in March. About two-thirds went to Republicans in February.

These banks paid good money for Democratic politicians and now there is a hint that serious derivatives reform might actually happen? What, politicians not obeying their corporate overlords? The deal with the devil has been violated?

Outrageous! Elect Republicans!

I think it’s time that Jamie Dimon got a spanking for being a naughty boy. Let’s write to senior senators on the Senate Agriculture Committee, the Senate Banking, Housing and Urban Affairs Committee, and the House Financial Services Committee and tell them to give Dimon and friends their due. The Senate bill has the derivatives language Dimon doesn’t like, but this language is not in the House bill. Here are some congresspeople who may be involved in conference negotiations to merge the bills. (The specific members haven’t been chosen yet.) I clipped out most of the Republicans since they probably won’t budge and they probably won’t play much role in conference anyway.

Senate Banking, Housing and Urban Affairs Committee

Christopher J. Dodd Chairman (D-CT) (202) 224-2823
Richard C. Shelby Ranking Member (R-AL) (202) 224-5744
Tim Johnson (D-SD) (202) 224-5842
Robert F. Bennett (R-UT) (202) 224-5444
Jack Reed (D-RI) (202) 224-4642
Charles E. Schumer (D-NY) (202) 224-6542
Evan Bayh (D-IN) (202) 224-5623
Bob Corker (R-TN) (202) 224-3344
Robert Menendez (D-NJ) (202) 224-4744
Daniel K. Akaka (D-HI) (202) 224-6361
Sherrod Brown (D-OH) (202) 224-2315
Jon Tester (D-MT) (202) 224-2644
Herb Kohl (D-WI) (202) 224-5653
Mark Warner (D-VA) (202) 224-2023
Jeff Merkley (D-OR) (202) 224-3753
Michael Bennet (D-CO) (202) 224-5852

Senate Agriculture Committee

Blanche Lincoln, Chairman (202) 224-4843
Patrick J. Leahy, Vermont (202) 224-4242
Tom Harkin, Iowa (202) 224-3254
Kent Conrad, North Dakota (202) 224-2043
Max Baucus, Montana (202) 224-2651
Debbie Stabenow, Michigan (202) 224-4822
E. Benjamin Nelson, Nebraska (202) 224-6551
Charles Grassley, Iowa (202) 224-3744
Sherrod Brown, Ohio (202) 224-2315
Robert Casey, Jr., Pennsylvania (202) 224-6324
Amy Klobuchar, Minnesota (202) 224-3244
Michael Bennet, Colorado* (202) 224-5852
Kirsten Gillibrand, New York* (202) 224-4451


House Financial Services Committee

Chairman Barney Frank (202) 225-5931
Rep. Paul E. Kanjorski, PA (202) 225-6511
Rep. Maxine Waters, CA (202) 225-2201
Rep. Carolyn B. Maloney, NY 202.225.7944
Rep. Luis V. Gutierrez, IL (202) 225-8203
Rep. Nydia M. Velázquez, NY (202) 225-2361
Rep. Melvin L. Watt, NC (202) 225-1510
Rep. Gary L. Ackerman, NY (202) 225-2601
Rep. Brad Sherman, CA (202) 225-5911
Rep. Gregory W. Meeks, NY 202/225-3461
Rep. Dennis Moore, KS (202) 225-2865
Rep. Michael E. Capuano, MA (202) 225-5111
Rep. Rubén Hinojosa, TX (202) 225-2531
Rep. William Lacy Clay, MO (202) 225-2406
Rep. Carolyn McCarthy, NY (202) 225-5516
Rep. Joe Baca, CA (202)225-6161
Rep. Stephen F. Lynch, MA (202) 225-8273
Rep. Brad Miller, NC (202) 225-3032
Rep. David Scott, GA (202) 225-2939
Rep. Al Green, TX (202) 225-7508
Rep. Emanuel Cleaver, MO 202.225.4535
Rep. Melissa L. Bean, IL (202) 225-3711
Rep. Gwen Moore, WI 202-225-4572
Rep. Paul W. Hodes, NH (202) 225-5206
Rep. Keith Ellison, MN (202) 225-4755
Rep. Ron Klein, FL (202) 225.3026
Rep. Charles Wilson, OH (202) 225-5705
Rep. Ed Perlmutter, CO 202.225.2645
Rep. Joe Donnelly, IN (202) 225-3915
Rep. Bill Foster, IL (202) 225-2976
Rep. Andre Carson, IN 202-225-4011
Rep. Jackie Speier, CA (202) 225-3531
Rep. Travis Childers, MS (202) 225-4306
Rep. Walt Minnick, ID (202) 225-6611
Rep. John Adler, NJ (202) 225-4765
Rep. Mary Jo Kilroy, OH (202) 225-2015
Rep. Steve Driehaus, OH (513) 684-2723
Rep. Suzanne Kosmas, FL (202) 225-2706
Rep. Alan Grayson, FL (202) 225-2176
Rep. Jim Himes, CT (202) 225-5541
Rep. Gary Peters, MI (202) 225-5802
Rep. Dan Maffei, NY (202) 225-3701
Rep. Scott Garrett (NJ) (R) (202) 225-4465
Rep. Jeb Hensarling (TX) (R) (202) 225-3484

Barack Obama 202-456-1111

This piece from FDL has a good summary of all the differences between the bills.

The US Chamber of Commerce has also helped me figure out my biggest priorities. The US Chamber of Commerce? Yes, exactly.

The Chamber of Commerce has identified two provisions as its top priorities — eliminating the Senate bill’s requirement that banks spin off their derivatives operations and blunting the independence of a new consumer financial protection agency.

Therefore, logically, we should support these two provisions the hardest.

Ok, that’s a little cynical, but from what I’ve seen from Americans for Financial Reform and US PIRG it seems pretty on target.

Here’s the e-mail I’m sending to the senators. Phone calls will be similar. All these congresspeople are going to take a while, but it will be well worth it!

Dear X,

Due to the weakness of our nation’s financial system exposed by the recent economic crisis, I urge you to take aggressive steps to ensure continued prosperity and stability.

The recent Wall Street reform bill, S/HR 3217/4173 passed by the X Committee will soon be merged in conference. Please do your best to choose the strongest provisions from the House and Senate versions. You should fight to:

1) Retain the Lincoln language prohibiting government assistance to firms trading derivatives. This is Section 716 in the Senate bill. There is no reason why the US government should be subsidizing risky swaps transactions.

2) Create a truly independent Consumer Finance Protection Agency as in the House bill, not a mere branch of the Federal Reserve. However, adopt Senate language to remove CPFA exemptions for auto dealers, payday lenders and other arbitrary groups.

3) Retain Section 619 of the Senate bill calling for implementation of the Volcker rule to prohibit proprietary trading by banks. This will reduce systemic risk.

4) Retain House provisions mandating prefunded resolution authority, a hard 15:1 bank capital leverage cap, and a regular annual audit of the Fed. These provisions will help guarantee stability during a financial crisis and strengthen government accountability.

The above goals advance our whole national interest and not just the narrow concerns of a few industries. Our country needs you to see them through.

Thank You,

Please e-mail and call your congresspeople!