The reckless behavior of big banks on Wall Street, credit card companies and mortgage lenders caused a financial crisis that cost Americans millions of lost jobs, billions in taxpayer-funded bailouts and trillions of lost retirement savings.
It’s outrageous that after taking billions of our tax dollars in bailout money, the big banks are back to business as usual, taking billions in profits and spending hundreds of millions to pay lobbyists to fight against reforms that would protect us from their abuses in the future. We need financial reform that will hold corporations, big banks and individuals accountable, crack down on reckless behavior on Wall Street, rein in excessive bonuses and pay for executives, protect consumers from the exorbitant fees and deceptive practices of credit card companies, increase stability for small businesses, and prevent predatory lenders and borrowers from entering into loans they know cannot be paid back.
By demanding accountability from those who helped cause the financial crisis, we can make financial dealings safer and more transparent for American consumers, investors and small-businesspeople who play by the rules, and prevent future bailouts and job losses. Most importantly, we can lay the foundation for a financial system that promotes stability and long-term economic growth, rather than greed and short-term profits.
Thankfully, opponents of reform do not have an ally in U.S. Sen. Jack Reed, D-R.I., who is using his important seat on the Senate Banking Committee to push for the creation of a consumer financial-protection agency and strong derivatives reform.
Derivatives are unregulated investments whose value derives from an underlying asset. They now represent literally hundreds of trillions of dollars in investment activity, or 10 times as much as investment in stocks. Credit default swaps, one form of derivatives, were responsible for the collapse of the insurance giant AIG, which sold many such swaps that guaranteed to pay out insurance to many different investors if their investments in mortgages went bad, and then had to be bailed out to the tune of $134 billion when all of the mortgages did go bad.
The biggest financial institutions are fighting against the idea of requiring all derivatives to go through a clearinghouse to make sure the buyers and sellers really have the necessary capital for doing a particular trade, and alternately are lobbying to be able to run those clearinghouses if they are established. Most significantly, the banks are fighting against a requirement that derivatives be traded on an exchange.
In the stock exchange a buyer knows what price all the other buyers are paying. But in the derivatives market, the buyer – which can include pension funds and other institutional investors, as well as farmers, oil-heat dealers and others who want to make sure they can offer their customers a fixed price or get a fixed price for their product – has no ability to know whether they are getting a better or worse deal than everyone else. All of the information – and all of the power – rests with the derivatives dealers, who are mostly the very largest banks. Exchange trading will mean that the big banks no longer have a lock on all information about derivatives.
Thus the most effective means of ensuring that the derivatives markets operate fairly is reform that is as comprehensive as possible, with no loopholes and strong requirements for clearing and exchange trading of all derivatives. It is the only way that we will not leave ourselves vulnerable to yet another bailout.
It is important that Rhode Islanders encourage Sen. Reed to push for the strongest possible derivatives reform. There is no doubt that he, like every other member of Congress on a committee with oversight of the financial industry, is hearing quite a bit from the country’s largest banks. •
Peter Asen is the executive director of Ocean State Action.
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