They couldn't wait to surrender

They couldn't wait to surrender

by digby

In case you were wondering whether even the tepid economic reforms of the last few years were going to stick, I think we have our answer. The "cromnibus" bill that's about to pass the congress and likely signed by the president shows the effectiveness of the banking lobby at always, forever, getting what it wants. And it also shows that Democrats have been eager to have an excuse to do its bidding --- they are ostensibly still in charge but have evidently signed off on repeal of some of their own reforms. They couldn't even wait until the Republicans took over to formally surrender.

Vox explains what the piece of Dodd-Frank they're rolling back does:

What is Section 716 for?

Mike Konczal of the Roosevelt Institute has an accessible argument for Section 716. The basic case, however, is pretty simple. When FDIC-insured institutions fail, taxpayers are left holding the bag. So regulators need to closely monitor what happens with FDIC-insured money. But custom swaps are, by their nature, hard for regulators to supervise. Forcing them out of insured institutions reduces risk in the banking system.

Moreover, allowing banks to trade swaps with FDIC-insured money constitutes an unfair subsidy to the swaps industry.

What's the case against Section 716?

On one level, the case is obvious. Banks don't like it because it would be more profitable to trade swaps with FDIC-insured money and banks have a lot of clout on Capitol Hill. The repeal provision appears to have been written by Citigroup's lobbyists. But there are a lot of elements of the Dodd-Frank bill that banks don't like. Section 716 has attracted a disproportionate level of lobbyist attention because quite a few influential bank regulators — including members of the Obama administration — opposed an initial version of it.

That made it a bit of a weak link in the Dodd-Frank firmament. The result of that opposition was the promulgation of a compromise version in which the most standardized forms of swaps are exempted from the rule.

That's brought around many of the initial opponents, but banks still don't like it. Their argument on the merits is that it's actually safer to keep the swaps inside the FDIC insured institution because that way their value can be preserved for the benefit of the bank's creditors — including the FDIC.

Proponents of the current version of the rule argue that this has to be balanced against the risks posed by exotic financial products. They say keeping the standardized swaps in and the custom swaps out strikes the right balance. The industry disagrees.

Of course it does.
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