Lawmakers: Dodd-Frank Rollback Kept $10 Trillion in Swaps on Banks’ Books

[bananas]

Source: Wall Street Journal

A significant change made last year to the Dodd-Frank financial overhaul law produced new risks to investors by allowing banks to keep nearly $10 trillion in certain derivatives trades on their books, according to a study released Tuesday by two Democratic lawmakers.

The results were released by Sen. Elizabeth Warren of Massachusetts, a leading proponent of tough regulations on Wall Street, and Rep. Elijah Cummings of Maryland, the top Democrat on the House Overnight and Government Reform Committee. The two had asked financial regulators earlier this year to assess the impact of the change and the risks it created for taxpayers. The change curtailed a requirement that banks push certain high-risk swaps trading activities out of bank holding companies that enjoy access to the government safety net.

The Federal Deposit Insurance Corp. said in a letter to the lawmakers that the 15 banks currently registered as swap dealers along with their subsidiaries hold up to $9.7 trillion of the types of derivatives affected by the change, about 4.4% of all outstanding derivatives contract holdings at federally insured banks. The amount included about $6.1 trillion in credit derivatives, $1 trillion in commodity derivatives and $2.6 trillion in equities derivatives, according to the FDIC letter published by the lawmakers.

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Read more: http://blogs.wsj.com/moneybeat/2015/11/10/warren-dodd-frank-rollback-kept-10-trillion-in-swaps-on-banks-books/

[bananas]

1. Warren Puts $10 Trillion Price Tag on Swaps Rule Partial Repeal

http://www.bloomberg.com/news/articles/2015-11-10/warren-puts-10-trillion-price-tag-on-swaps-rule-partial-repeal

Warren Puts $10 Trillion Price Tag on Swaps Rule Partial Repeal
Cheyenne Hopkins, Silla Brush

- Lawmakers say Dodd-Frank revision let banks keep risky trades
- Letters urge SEC and CFTC to respond to legislative reversals

Two of Congress’s leading Wall Street critics have tried to put a price tag on one of the finance industry’s biggest wins in Washington in recent years, claiming that the 2014 rollback of a controversial swaps measure has allowed banks to keep $10 trillion of risky trades on their books.

Senator Elizabeth Warren and Representative Elijah Cummings based their calculation on letters from financial regulators that detailed the impact of the revision to the Dodd-Frank Act. While the two Democratic lawmakers failed to keep the change out of must-pass spending legislation at the end of 2014, they’re using their estimate to try to prevent the Republican-led Congress from giving banks similar relief this year.

In letters to the Securities and Exchange Commission and the Commodity Futures Trading Commission Warren and Cummings called on the agencies to counteract the legislative rollbacks as they complete rulemaking under Dodd-Frank, the law passed five years ago in response to the 2008 financial crisis. In a separate letter, they called on the Government Accountability Office to investigate the impact of last year’s reversal of a provision requiring banks to separate swaps trading from deposit-taking units.

“While the Dodd-Frank rollback and the weak margin requirements imposed by prudential regulators have created new risks for taxpayers and the financial system, your agencies are in position to mitigate these risks,” Warren of Massachusetts and Cummings of Maryland said in the letter to the SEC and CFTC. The lawmakers said their letters represent the first investigation into the impact of the change as regulators failed to “fully assess the economic and taxpayer risk.”

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[davidpdx]

2. 4.4%

Who's on the hook for the other 95%+ if things go south again?

[Nihil]

8. *cough*

> The change curtailed a requirement that banks push certain high-risk swaps trading activities
> out of bank holding companies that enjoy access to the government safety net.

Surprise! It's you(*)!




(*) = US taxpayer

[davidpdx]

9. Yep, that's what I'm afraid of

So instead of 100% we only get screwed for 95.6%. Wonderful.........

[bananas]

3. US banks said to hold $10tn of ‘risky’ trades

http://www.ft.com/cms/s/0/b8076642-87d3-11e5-9f8c-a8d619fa707c.html

November 10, 2015 7:22 pm

US banks said to hold $10tn of ‘risky’ trades

Barney Jopson in Washington and Ben McLannahan in New York

The repeal of part of the Dodd-Frank financial reforms has left big US banks holding $10tn of “risky” derivatives trades on their books, according to an investigation by Democrats.

Senator Elizabeth Warren, a liberal Wall Street foe, said the repeal — which sparked a firestorm when it was slipped into a budget bill in December 2014 — had left federally insured banks exposed to dangerous swaps trades.

The rollback of the relevant rule, which followed almost no congressional debate, sparked stinging criticism of Wall Street and cemented perceptions of the pernicious influence of bank lobbyists on Capitol Hill.

<snip>

[stuffmatters]

4. So there are over 200 trillion outstanding derivatives contracted to federally insured banks?

If 4.4% of all outstanding derivatives contract holdings at federally insured banks is 9+ trillion, my math says that the US taxpayers & depositers are on the total hook ( FDIC insured) for over 200 triillion dollars of derivatives....
How can anybody in their right mind not want to bring back Glass-Steagall?

[Hydra]

10. The people who are benefiting, or think they are, are smokescreening

When the house of cards collapses, they'll tell us all about what they did while demanding we keep them propped up again.

[Festivito]

5. That's 10T$ in CASH.. in our 15T$/year economy. If they call in that loan, we're toast!

A million dollars won't buy a loaf of bread.

And, there is over 600T$ of this "cash" out there. That's over six times the world's economy. Sheesh!

[geek tragedy]

14. No, it's not $10 Trillion in cash. That number is notional value, not actual value.

It's very hard to get actual numbers on the value of derivatives, because a lot of them have a big reference/notional number but small actual value, and because a lot of them either offset each other or are a hedge to an asset already on the bank's balance sheet.

[sorechasm]

6. Another 'find' that baffles the mind that the GOP is desperate to hide.

Thank the universe for Senator Warren and Congressman Cummings.

I doubt she's going to let this one go.

[IthinkThereforeIAM]

7. So when is this going to come due...

Last edited Wed Nov 11, 2015, 09:03 AM - Edit history (1)

... in about 12 months?

[whatthehey]

11. Oh Christ not this crap FUD again

Derivatives are nothing more than (slightly) more complicated bets, and their notional value is irrelevant nonsense.

Imagine a midlevel bar-room bookie who took $2000 in bets that the Colts beat the Broncos and $2200 in bets the other way, ignoring the spread for ease of explanation. Using math like these silly scare numbers you'd say "My God Joe the bookie is in the tank for $4200!!! He's only got $1000!! He's toast!!!" Of course he's on the hook for no such number. In fact he makes $200 in profit plus vig, because more people bet on the losing side.

Even if you say "well the bar is the economy, not just Joe" all we have seen is a transfer of wealth from Broncos backers to Colts backers and Joe skimming a bit. There isn't a huge drop in the bar economy, and next week the money will transfer in some other direction.

There isn't hundreds of trillions out there to pay these derivatives, but there isn't hundreds of trillions of risk either, by many orders of magnitude, because if, say, interest rates go up in 2016, the net value of all the derivatives based on 2016 interest rates cancels out between those who guessed right and those who didn't. The market would simply not exist if EVERYBODY bet that interest rateswould rise and nobody bet the other way. Even bar level bookies like Joe know to lay off any out of balance bets on specific games, so I doubt the Harvard MBA masters of the universe crowd missed that bit of basics.

[Sunlei]

12. can we americans as a 'group' declare bankruptcy & make that 10 trillion go away, please.

tell wall street to pound sand.

We can start over fresh without 10 trillion in fake debt put on the American people again.

[lostnfound]

13. Who voted for the rollback and allowed this mess? Nt

[angrychair]

15. It ok, we have "real world solutions"

Our government will "compromise".
American taxpayers will pay hundreds of billions to prop up banks again (to big to fail) and certain candidates will continue to have millions of dollars funneling into their SuperPACs. What a great "compromise"! Everyone is happy