The Senate budget (yawn) weekend drama

It's not easy to tell what all these clowns are arguing about.  The gist seems to be that the leadership of both chambers of Congress, which is to say both parties, wants to do a fairly long-term $1+ trillion 1600-page budget compromise bill that takes us through next September rather than only through February, when the newly elected Congress will feature a very new mix of votes.  In order to reach their compromise, both sides honored the season by tacking some ornaments onto the tree, the most controversial of which is a technical change to the Dodd-Frank financial institution "reform" bill.

The Dodd-Frank amendment generally is described in the press as a measure to allow large federally insured banks to continue trading in derivatives, i.e. swaps and futures. Progressive darling Sen. Warren is more likely to call it a measure that all but guarantees future taxpayer bailouts of banks that will be permitted to engage in just the sort of mystifying financial shenanigans that caused the 2007-2008 financial crisis, to the extent that the crisis was not personally caused by President Bush's reading of "My Pet Goat" and secondarily by Vice President Chaney's coddling of torturers within the CIA. In fact, however, the Dodd-Frank provision on derivatives has very little to do with either increasing or decreasing the inherent riskiness of banks' business, or the risk of a future taxpayer bailout, as is ably explained in this Powerline piece:

The original legislation required major banks to “push out” some of their swaps business — for example, hedging the risk in their securities trading book for market making on behalf of clients — into “non-bank” subsidiaries which do not take deposits and are not insured or covered by the deposit insurance provided by the Federal Deposit Insurance Corporation (FDIC). The idea was that a failure of one of these “push out” subsidiaries would have no call on the FDIC and “taxpayer bailouts”. Most more-or-less conventional hedging activity such as interest rate swaps, which mitigate risk in the banks’ loan books, was allowed to remain in the bank subsidiaries anyway. Hedging on equity securities and commodities would be forced into a non-bank subsidiary by the “push-out” rule. While relatively modest in volume terms for the banks, they are more profitable and likely have more strategic value for the banks’ clients (especially commodities hedging).

The revision would loosen this requirement of Dodd-Frank and permit much of the “push-out” swap activity to remain in the FDIC-insured bank subsidiaries of the large bank holding companies–mainly Citicorp, Bank of America, JPMorgan Chase and Wells Fargo. (Morgan Stanley and Goldman Sachs already conduct their swaps and derivatives activity in non-bank subsidiaries.) There are efficiency, cost and operational benefits for these institutions to retain all swaps activity done for hedging purposes in the bank subsidiaries, as explained by Fitch Ratings. Regional banks are interested in the change to Dodd-Frank as well since they do not typically have securities (non-bank) subsidiaries and conduct their swaps activities as a commercial banking service within their FDIC bank. But, admittedly, this is of interest to no more than about two dozen institutions, so politically could be viewed as narrow interest legislation.

However, there is no reason to think that the “push-out” provision of Dodd-Frank has lessened the “too big to fail” risk of major financial institutions at all! The recent analysis of the effects on “too big to fail”, i.e., “taxpayer” “bailouts” by the House Financial Services Committee, detailed the several mechanisms by which Dodd-Frank itself provides bailouts irrespective of whether an institution is an FDIC bank. Quite simply, if the concern is the risk in regulated FDIC backed banks, hedging of risks with swaps and other derivatives would seem beneficial. Indeed, both the former Federal Reserve Bank Chairman and FDIC Chairman, neither an ideologue and the latter a Democrat, support the change because to move this risk management hedging activity out of tightly regulated banks may actually increase systemic risk, as well as cost, for little discernible benefit.

So why oppose it? The counterargument is that all these activities simply cannot be controlled within the banks and inevitably will lead to future “bailouts”. In particular, I suspect that an exemption for high quality hedges on structured securities, i.e., bundles of underlying loans, has raised concerns among the Dems. But why a Credit Default Swap is a “risky bet,” but loans with the same borrower are not “risky bets,” has never been explained.

Eh. What difference, at this point, does it make? It has to do with big banks, and it's arcane, and journalists are as inclined as their reading public to equate "derivatives" with the collapse of the American banking system. So it's a good way to explain why attacking this budget deal and risking a government shutdown has suddenly become a principled Progressive stand in favor of middle-class America, instead of the terroristic right-wing tactic of only a couple of years ago.