(Updated) House Ag committee Dems vote to deregulate derivatives

UPDATE: The Dems voting with the bank and against the taxpayers on HR 992 (described below) are:

Pete Gallego (TX-23)
Ann Kuster (NH-2)
Sean Patrick Maloney (NY-18)
Mike McIntyre (NC-07)
David Scott (GA-13)
Juan Vargas (CA-51)

Of these, the surprise is NH frosh Ann Kuster. Watch her closely. And in case you’re interested, that number again is 202-225-5206.

UPDATE 2: You’ll notice that the whole vote, as reported, was 31-14. The six Dems could have voted No and the motion would still have passed. This means, their votes weren’t needed. Speaking for myself alone, I can only see this as a request for campaign funds from bank lobbyists on the part of these Dems. Even if this is a sincerely held position (putting taxpayers on the hook for bank casino losses), this public declaration as a very bank-friendly act.

This is a major under-the-radar story. The House Agriculture Committee, including its Democrats, voted just this week to gut the Dodd-Frank regulation of derivatives by approving a series seven bills. Of the seven, six are strongly opposed by public-interest regulation watchdogs. All seven bills now go to the House floor for a vote there.

This is a bad-Dems story, and also a derivatives story.  I’m coming to it slowly, so we’ll do the broad strokes below, and the details in a follow-up.

Background — Derivatives risk and the “London Whale”

Chris wrote about the London “Whale” here, a commodity trader at Jamie Dimon’s JPMorgan Chase, who helped rack up, along with the rest of his group, a reported $2 billion in trading losses late last year (but see below for a more recent number) — all by aggressively trading the derivatives market in credit default swaps (CDSs).

Credit default swaps are pure casino bets. They were originally designed as a form of insurance against bond and other credit defaults (“I’ll pay you a monthly fee and you pay me my losses if these bonds default.”)

It’s a simple concept, but CDSs soon evolved. Turns out you don’t have to actually hold the bonds to insure them. This means that one guy can sit at a table with a bunch of bonds (or bundles of mortgages), while another guy can insure them. Meanwhile, at 50 other tables, 50 more guys can buy the same “insurance” on the same bonds from anyone who will sell it to them. Keep in mind, only the first guy actually holds the bonds. The other guys just know they exist.

That’s 50 side-bets on one set of bonds. Placing side-bets on someone else’s property is like betting on a ball game you’re just watching. Like I said, pure casino money.

Do you see the problem? One guy’s bonds default and suddenly 51 guys in that room, everyone who sold “insurance,” they’re all wiped out. Why? Because the dirty secret of derivatives bets is that the people offering the “insurance” rarely have the money. They’re betting that they can collect “insurance” fees forever and the defaults will never come. That’s what happened with mortgage-backed bets in 2007, and that’s what’s happening today.

And thanks to the U.S. government’s bailout of Wall Street mortgage-derivatives (many of which were, yep, CDSs), these “insurers” know they’ll never need the money — Uncle Sam will pay those bets for them, with your money.

Let’s say that simply. Banks are placing billions of dollars in casino bets per day with Uncle Sam’s money, and you’re on the hook for the losses. Sweet deal, right? But this isn’t just theory.

The London Whale matters because he’s not oh-so-2007, he’s oh-so–last December. Jamie Dimon and JP Morgan Chase (corporations are just force-extenders for greedy humans, remember) are at it today, and thanks to a Congressional investigation report released just last week, we know the extent of the problem and that Dimon’s been lying through his teeth about it.

Here’s just the opening of House member Carl Levin’s devastating investigative report (pdf; my emphasis):

March 15, 2013

JPMorgan Chase & Company is the largest financial holding company in the United States, with $2.4 trillion in assets. It is also the largest derivatives dealer in the world and the largest single participant in world credit derivatives markets. Its principal bank subsidiary, JPMorgan Chase Bank, is the largest U.S. bank. JPMorgan Chase has consistently portrayed itself as an expert in risk management with a “fortress balance sheet” that ensures taxpayers have nothing to fear from its banking activities, including its extensive dealing in derivatives. But in early 2012, the bank’s Chief Investment Office (CIO), which is charged with managing $350 billion in excess deposits, placed a massive bet on a complex set of synthetic credit derivatives that, in 2012, lost at least $6.2 billion.

The CIO’s losses were the result of the so-called “London Whale” trades executed by traders in its London office – trades so large in size that they roiled world credit markets. Initially dismissed by the bank’s chief executive as a “tempest in a teapot,” the trading losses quickly doubled and then tripled despite a relatively benign credit environment. The magnitude of the losses shocked the investing public and drew attention to the CIO which was found, in addition to its conservative investments, to be bankrolling high stakes, high risk credit derivative trades that were unknown to its regulators.

The JPMorgan Chase whale trades provide a startling and instructive case history of how synthetic credit derivatives have become a multi-billion dollar source of risk within the U.S. banking system. They also demonstrate how inadequate derivative valuation practices enabled traders to hide substantial losses for months at a time; lax hedging practices obscured whether derivatives were being used to offset risk or take risk; risk limit breaches were routinely disregarded; risk evaluation models were manipulated to downplay risk; inadequate regulatory oversight was too easily dodged or stonewalled; and derivative trading and financial results were misrepresented to investors, regulators, policymakers, and the taxpaying public who, when banks lose big, may be required to finance multi-million-dollar bailouts.

And that’s just the start of the report. It’s really thorough, and it made the news.

But that was last week in the House. This week in the House, Democrats on the Agriculture committee voted to blow massive holes in … derivatives regulation.

House Democrats vote to dismantle derivatives regulation and increase taxpayer backing for bank losses

Your Democratic party in action, serving their constituents — Money.

Remember when I said it’s only on rights issues — women’s rights, gay rights — that the Democrats were better than Republicans? That on economic issues, both parties represent the billionaire consensus (“All your money are belong to us“)?

This is how that works in the real world. From Zach Carter at the Huffington Post:

Corruption via Shutterstock

Corruption via Shutterstock

A House Committee approved six new bills [of seven total] to deregulate Wall Street derivatives on Wednesday, advancing legislation that would expand taxpayer support for derivatives and create broad new trading loopholes allowing banks to shirk risk management standards created by the 2010 Dodd-Frank bill.

The House Agriculture Committee passed all six bills with broad bipartisan support, just five days after Sen. Carl Levin (D-Mich.) released a report detailing extensive failures to contain derivatives risks at JPMorgan Chase — troubles that lead to billions of dollars in losses from a single trade.

The legislation will next be considered by the full House of Representatives.

The most controversial bill to advance Wednesday is explicitly designed to expand taxpayer backing for derivatives. It was the only legislation that lawmakers were required to cast individual votes for or against; the others were all approved by unanimous voice votes. The bill to increase taxpayer support for bank derivatives dealing was approved by a vote of 31 to 14.

The suite of seven bills is listed here. All passed. The good bill is HR 742. All the rest stink (pdf). My understanding is that all but one passed on a voice vote, with a roll call on H.R. 992, the Swaps Regulatory Improvement Act. That’s the one that Carter says passed 31 to 14.

This now goes to the House  floor. Stay tuned. If these bills pass and become law, the next banking meltdown just might precede full Arctic melt, rather than follow it.

Naming Democratic names

The government’s website hasn’t updated the vote in this committee, so I don’t have the breakdown for you. I’ll update this table when that happens. In the meantime, here are your 22 (correction: 21) Dems on this committee:

Last Name First District Party Phone Number Agr. Cmte Frosh?
Peterson (N) Collin MN-7 D 202-225-2165 2
Bustos (N) Cheri IL-17 D 202-225-5905 1 Y
Costa  (N) Jim CA-16 D 202-225-3341 1
Courtney (N) Joe CT-2 D 202-225-2076 1
DelBene (N) Suzan WA-01 D 202-225-6311 1 Y
Enyart (N) William IL-12 D 202-225-5661 1 Y
Fudge (Not voting) Marcia OH-11 D 202-225-7032 1
Gallego (Y) Pete TX-23 D 202-225-4511 1 Y
Garamendi (N) John CA-03 D 202-225-1880 1
Kuster (Y) Ann NH-2 D 202-225-5206 1 Y
Lujan Grisham (N) Michelle NM-1 D 202-225-6316 1 Y
Maloney (Y) Sean NY-18 D 202-225-5441 1 Y
McGovern (N) Jim MA-2 D 202-225-6101 1
McIntyre (Y) Mike NC-07 D 202-225-2731 1  
Negrete McLeod (N) Gloria CA-35 D 202-225-6161 1 Y
Nolan (N) Rick MN-8 D 202-225-6211 1 Y
Schrader (N) Kurt OR-05 D 202-225-5711 1
Scott (Y) David GA-13 D 202-225-2939 1
Vargas (Y) Juan CA-51 D 202-225-8045 1 Y
Vela (N) Filemon TX-34 D 202- 225-9901 1 Y
Walz (N) Tim MN-1 D 202-225-2472 1

Seven (actually six) of these names voted the wrong way. I’m pretty sure the ranking member (Collin Peterson) was a No vote, since he spoke strongly against these bills, and Maloney and Scott are co-sponsors, so I assume they voted Yes. But I can only guess about the rest. When the vote is reported, I’ll bold the names of the other Yes’s as well. (Update: The vote record is indicated above; roll call here.)

These will be wall-of-shame names; feel free to tell them so.

Bottom line

This is more than a big deal. This legislation — bought and paid by bankers on Wall Street — could put us right back to 2006, just months before the crash cum bailout that brought you the current economic world. All so Jamie Dimon can burn money like paper and parade his ego through a world of his minions.

This shouldn’t stay under the radar. I’m going to report the minions here, and again when the full House votes. Until then, I’ll leave you with this, a single sentence from Congressman Alan Grayson:

“The road to hell is paved with these bills.”

So true. What you never hear about can kill you.


To follow or send links: @Gaius_Publius

Gaius Publius is a professional writer living on the West Coast of the United States.

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28 Responses to “(Updated) House Ag committee Dems vote to deregulate derivatives”

  1. GaiusPublius says:

    You’re not alone in thinking that, Naja.


  2. karmanot says:

    Harry Reid ——- zero

  3. karmanot says:

    With enemies like Democrats, who needs Republicans.

  4. FedUp says:

    Listen to Kuster talk about her votes against ALL budget proposals, including the ones from the Progressive Caucus and the Congressional Black Caucus:


    “”Unfortunately, none of the budget proposals on the table this week
    reflect the type of bipartisan compromise that New Hampshire families
    expect and deserve,” freshman Rep. Annie Kuster,
    D-N.H., said in a statement Wednesday. “Now that both parties have
    offered proposals, it’s time for Republicans and Democrats to come
    together and negotiate a balanced, bipartisan plan that will reduce the
    deficit, help create jobs, and grow the economy.””

    Doesn’t sound like the PCCC endorsed progressive that ran in 2010 and 2012 …

  5. Ford Prefect says:

    Thanks for the update. I figured Vargas would go along and he did. I’m in his district, so he’s going to hear from me. I will actively campaign against him in two years. I don’t care if we have to write in my neighbor’s golden retriever to do it. What a scumbag.

    “In office only a few months, Juan Vargas voted to destroy the global economy in exchange for unannounced cash and prizes. Good going, Juan!”

  6. BeccaM says:

    One key detail left out of this rather helpful and educational narrative, Gaius: The overall size of the derivatives market.

    Estimates vary, but the number I see cited most often dates from 2012 and puts it at $1.2 quadrillion dollars. That’s right: One thousand trillion dollars, or 20 times the size of the entire world’s non-derivative economy.


  7. Naja pallida says:

    Like most things in Congress, it’s a shell game, and the party in control sends bills through the committee that they think will garner the most amount of support and least amount of scrutiny.

  8. Naja pallida says:

    Well, this is just the House side of things, so she has no input anyway… but it would be nice if Harry Reid had the courage to head them off at the pass before it ever even comes up in the Senate. Hahaha.. ahahahaha… Harry Reid… courage… in the same sentence. Sorry.

  9. Naja pallida says:

    Sounds to me like they’re using it as a way of doing an end around the committee they know would just shoot it down. The Congressional way of going to ask dad when mom says no.

  10. GaiusPublius says:

    Thanks, but actually i studied this stuff a lot, and my understanding is pretty good. The mortgage crisis went like this — banks were able to sell tranches of RMBS’s (retail mortgage-backed securities, a kind of derivatives) into the Global Pool of Money (PBS’s term) as fast as they could make them. So places like Countrywide were writing mortgages as fast as possible, then selling them to bundling shops (middle men) who then sold the bundles to Goldman Sachs et al, who tranched them and sold the tranches.

    THEN they bought CDS’s as “insurance” against the failure of the tranches and traded those. So there are several kinds of derivative in play here (there’s even a third kind, a derivative that has derivatives inside it).

    But the big boom in 2007 happened because of the CDS’s — because once mortgages started failing, all the “insurers” couldn’t make good (AIG was one of the big ones, but not alone). It’s the multiplier effect that CDS’s create (again, fifty side bets on one mortgage bundle, multiplied by however many bundles were created) that really exploded the economy. The govt was then in the business of making AIG (et al) whole so the insurers could make Goldman (et al) whole.

    The article above just focuses on the CDS’s because that’s what the current legislation is about. But nothing’s misstated.


  11. GaiusPublius says:

    Historically, derivatives are a flavor of hedging, similar to commodities futures. It’s just that there’s a well-regulated futures market, and an unregulated derivatives market. But Ag is one of the places these bills go, as well as to the House Financial Services committee.



  12. GaiusPublius says:

    Six on voice vote, and one on roll call, the imfamous HR 992. I’m still chasing down that roll call list. If anyone finds it first, please post in the comments. I want to update that table. Thanks!


  13. Ford Prefect says:

    I believe it’s because derivatives are covered under the Commodities Futures Trading Act and anything pertaining to commodities goes to Ag Committee. Institutionally, it’s “mission creep.”

  14. lynchie says:

    This sounds like typical Wall Street double talk. Throw a bunch of shit in the air and the rubes will scurry to eat the little turdlets.

  15. lynchie says:

    His own wealth

  16. lynchie says:

    This way Elizabeth Warren gets no say and has no ability to stop it.

  17. dula says:

    I’ll condense it for you. Dirty Neoliberals/Neocons deregulate the financial industry so that traitorous Wall St. douchebags can commit fraud/collapse the economy for their own profit at the expense of the sustainability of this nation.

  18. lynchie says:

    It is done to confuse us the 99%. Most people won’t pay any attention and the few that do, well who the fuck cares what we think

  19. nicho says:

    Shitty bills — manure — sounds like a job for Agriculture to me.

  20. nicho says:

    What exactly are you “in the business” of?

  21. Ford Prefect says:

    According to Matt Stoller’s twitter feed yesterday, these bills passed out of committee on voice votes, which usually means no voting record, right?

    In any case, this will be at the root of the next financial crisis, which will obviously be much worse because of it.

  22. Naja pallida says:

    I fail to understand how any of this is the purview of the Agriculture committee. Sounds to me like they’re just using that committee to hide a bunch of shitty bills, because everyone has their eye the banking committee, and they would be shot down if they had proper scrutiny.

  23. Mark says:

    I gave specific explanations of several errors, but I’m not in the business of providing basic education to writers who don’t appreciate the limits of their own knowledge.

  24. condew says:

    When a critic just says “you’re wrong” without an explanation adequate to demonstrate their own expertise, I tend to just dismiss the criticism as just another crank or troll.

  25. condew says:

    How does the Agriculture committee have jurisdiction over a banking matter like this? Why is the Banking committee not defending its turf?

  26. lynchie says:

    A so the looting continues.

  27. unrepentant_expat says:

    Why is this not front line news on MSNBC? If anyone should be replacing Ed Schultz, it should be you,

  28. Mark says:

    Your understanding of financial markets is, at key points, totally incorrect. The financial instruments at the heart of the federal bailout of the U.S. mortgage industry were *not* credit default swaps. Not all derivatives are CDS, by the way. Oh, and Carl Levin is a U.S. senator, not a member of the House of Representatives. You refer to Levin both ways is this article. Perhaps if you stopped paraphrasing the Huffington Post, and took time to review primary sources, your attempt to condense complicated material into understandable reporting would be more successful.

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