May 13, 2010

United States Senate
Washington, DC 20510

Re: Oppose Amendment #4110 to Replace Sec. 716 Derivatives Anti-Bailout Provision with a Study

Dear Senator,

The over 250 consumer, employee, investor, community and civil rights groups who are members of Americans for Financial Reform (AFR) write to express strong support for Section 716 (“Prohibition Against Federal Government Bailouts of Swaps Entities”) and our opposition to the new Amendment #4110 to replace the provision with a study. The study would put the final decision over implementing this important new structural reform in the hands of regulators who have already publicly expressed their opposition to it.

The following are rebuttals to the primary arguments that have been advanced against Sec. 716:

Swaps Desks will Remain within the Bank Holding Company: Sen. Lincoln has clarified that the amendment would only separate derivatives desks from the core bank within the bank holding company – that is, the insured depository institution that has access to the Federal Reserve window. Moving these operations outside of the federally-protected core of the bank will only reduce the risk of future bailouts, still enabling the holding company to benefit from this lucrative business.

716 Will Not Lead to Weaker Regulation or Flight Overseas: Americans for Financial Reform is committed to bringing derivatives out of the shadows; we would not support a provision that weakened oversight of derivatives dealers. Under the derivatives title, any major swap participant will be subject to oversight and safeguards for capital adequacy, transparency, anti-fraud and anti-manipulation. In addition, the claim that the market will migrate overseas ignores the economic turmoil in Europe that was in large part exacerbated by unregulated derivatives activities.

Derivatives Dealing is Not the Usual Course of Banking: Some have argued that derivatives selling should remain within the core depository institutions because it is part of the “usual business of banking”.  If that were the case, then why do only 5 out of America’s over 8,000 banks – the Wall Street banks JPMorgan Chase, Citigroup, Bank of America, Goldman Sachs and Morgan Stanley – account for over 90 percent of this market? The “usual” banking businesses in the U.S., represented by the Independent Community Bankers Association of America, support Sec. 716.

Banks Can Still Use Derivatives to Hedge Their Risk Under 716: Separating swap dealing operations from the business of banking does not mean that banks will be unable to hedge their banking risks. They will be customers and trade on open exchanges and clearinghouses.

Purely speculative financial derivatives now represent $78 for every $1 in true hedging by businesses and farmers.  By quarantining highly risky swaps trading from banking altogether, federally insured deposits will not be put at risk by toxic swaps transactions. Moreover, banks will be forced to behave like banks, focusing on extending credit in a manner that builds economic strength as opposed to fostering worldwide economic instability.

For these reasons, Americans for Financial Reform urges you to oppose Amendment #4110. Please contact Lisa Lindsley, Director, Capital Strategies, AFSCME, for more information

Sincerely,

Americans for Financial Reform