Today, Heather Booth, Director of Americans for Financial Reform, stated,

“Section 716 of the Senate derivatives title remains one of the most critical, structural reforms left standing in the Wall Street Reform bill. Wall Street lobbyists have thrown everything they have at it because they want to keep using Americans’ deposits and federal dollars to fund their reckless gambling. With the clarifications that Sen. Lincoln has announced, the proposal still tells Wall Street: ‘gamble with your own money!'”

Jane D’Arista, co-coordinator of SAFER, the Economists’ Committee for Stable, Accountable, Fair and Efficient Financial Reform, explains the strengths of the clarified version of Sec. 716 in detail:

” * The plan removes the ongoing federal subsidy to the derivatives business of the 5 large banks.  Moving derivatives dealing to separately capitalized affiliates of a bank holding company will cut off the swaps desks’ access to deposits and FDIC deposit insurance.  They also will not have access to the Fed discount window as they do today for ongoing near-zero interest loans.  The provision allowing them emergency Section  13(3) Fed loans during a crisis is limited by two important restraints:  13(3) is for emergency situations and is only available under the Senate bill to solvent institutions, not to prop up or bailout a firm.  This means that the Fed can provide temporary liquidity if an otherwise solvent derivatives affiliate is affected by a generalized market meltdown – a safety valve that has long been in place to deal with out-of-the-ordinary market failures.  While this is not a complete shutoff from the potential of federal assistance, it is a significant improvement over the status quo of ongoing subsidies and will change the way banks do business.

*   Bank capital will be used for lending and real investment in Main  Street, not marketing empty gambles on Wall Street. The shortfall in lending to small businesses by banks that have earned large profits dealing derivatives is one of the more urgent reasons to rein in a market where speculation outweighs its direct benefits to economic activity.  As the Bank for International Settlements points out, less than 10 percent of the OTC derivatives market involves transactions for businesses in the real economy (“commercial end users”).  A separately-capitalized affiliate will have to raise funds on its own, and banks will stop diverting our federally-insured depository capital from the main business of banking.

*   Moving derivatives activities from the off-balance-sheet recesses of  banks to free-standing affiliates makes a substantial contribution to transparency.  The true balance sheet positions of both the bank itself and its derivatives affiliate can be better assessed by regulators, investors and other market participants.  Lack of transparency caused the 2008 crisis to take the form of a credit crunch.  Failure to increase transparency will perpetuate the potential for another such event.”