Congressional Budget Makes Room For Big Bank Bailouts

Wednesday, December 10, 2014
By Paul Martin

Heide Moore
Dec. 10, 2014

Congress has agreed to use federal deposit insurance, which was designed to protect the savings accounts of consumers, to cover risky trading by the nation’s biggest banks.

In a small provision in the budget bill, Congress agreed to allow banks to house their trading of swaps and derivatives alongside customer deposits, which are insured by the federal government against losses.

The budget move repeals a portion of the Dodd-Frank financial reform act and, some say, lays the groundwork for future bailouts of banks who make irresponsibly risky trades.

“It’s both a stealth move and indefensible,” said Dennis Kelleher, the head of Better Markets, a group that argues for great oversight of banks. In a note to clients, he later called it “a sneaky, midnight repeal.”

“If Wall Street gets the upside in big bonuses from its high-risk derivatives deals, then it should also have to pay the downside for any losses,” Kelleher wrote.

Richard Trumka, the head of labor union AFL-CIO, said his organizations also objected to the budget provision.

“Dodd-Frank forced too-big-to-fail banks to move potentially toxic speculation in derivatives out of their government-insured banks,” Trumka said in a statement. “Wall Street’s friends in Congress are trying to once again put the public on the hook for the most dangerous aspects of the financial system.”

Banks make their money primarily through two activities: lending out deposits to people or companies, and speculating on the markets. Laws like the defunct Glass-Steagall act were designed to separate the two activities. The Dodd-Frank rule recaptured a small part of that separation.

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