Legislation Seeks to Wall Off Derivative Trading from Bank Depositors’ Money
April 15th, 2010Via: Bloomberg:
Goldman Sachs Group Inc., JPMorgan Chase & Co. and their biggest rivals would be forced to wall off derivatives trading operations from their commercial banks under a measure to be introduced by Senate Agriculture Committee Chairman Blanche Lincoln, a congressional aide said.
Lincoln, an Arkansas Democrat, will propose a “no-bailout provision” as part of an overhaul of derivatives regulation she plans to unveil today, according to the aide, who declined to be identified because the plan isn’t public. The measure aims to ensure banks don’t endanger depositors’ money with risky trading of over-the-counter derivatives, the aide said.
The proposal is already drawing opposition from banks that dominate the $605 trillion over-the-counter market. Derivatives regulation being weighed by Congress could cost JPMorgan from “$700 million to a couple billion dollars,” Jamie Dimon, the bank’s chief executive officer, said yesterday during a conference call with analysts.
“I imagine their lobbyists have already contacted their best contacts in the government,” said Darrell Duffie, a finance professor at Stanford University in Palo Alto, California.
The five biggest dealers in the largely unregulated market — all commercial banks — earned $28 billion from derivatives trading last year, according to reports collected by the Federal Reserve and people familiar with the matter.
Research Credit: dagobaz
Good in theory, in practice I’m not so sure how effective it’ll be. Why? Because the banks will continue to dig themselves into a hole with derivatives and then demand a bailout because they’re “too big to fail”. Who’s left holding the bag in the bailout? The same people with the deposits this is trying to protect.