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Chris Dodd, chairman of the Senate banking committee, and Blanche Lincoln, chairman of the agriculture committee, told the Financial Times that there was room to negotiate on a proposal that would force banks to spin off their swaps desks.If passed, the proposal would mean that banks would most likely close down their gambling operations and stick to good, old-fashioned banking. As you might guess, banks are jumping up and down in opposition to this move.
They claim that it will interfere with their trading and swaps. Banks use swaps to hedge some positions. The proposal would bring an end to the crazy trades where banks have one position and then trade against it. Banks bet that the trades will lose by short selling, thus driving down the price of the security. It no longer becomes a hedge but a way to slam a security, thus causing losses to those who hold it.
Also, keep in mind that banks can now borrow from the Federal Reserve at zero or .5% interest and use the money to finance their gambling operations.
One blatant example of what can happen actually occurred last week when short-sellers slammed the Dow down 998 points or $1 trillion dollars in just a few minutes. Traders can crash any market at will. The investor has no protection against the high volume and high speed of these trades.
The next step is that the Senate and House versions of the bill will be merged and sent to President Obama for his signature.
Do you agree that banks must spin off their swap business and stick to regular banking?
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Reader Comments (Page 1 of 1)
5-17-2010 @ 2:09PM
thedude said...
I am on the fence about this.
I think to protect the average bank investor there should be a type of bank that is prohibited from trading in derivatives. Call them Class A banks. Their investments would be extremely well regulated. These banks would be allowed to borrow at low interest from the federal reserve and have their accounts covered by the FDIC. These banks would be limited to say $1 billion in assets/deposits. Large format of the good ole "Bailey Building and Loan" if you will.
Then there should be Class U banks (for unregulated or unethical - your choice). These would be essentially the banks that were too big to fail, and the current crop of investment banks. They would be prohibited from borrowing federal reserve funds, their accounts would not be protected by the FDIC. Essentially they would be "invest at your own risk" banks. They fail? They steal your money ? Too bad! You shouldn't have invested with them in the first place. These are the banks that would deal in these exotic investments BUT they would be prevented from controlling more than 1% of the stock of any company. To prevent them from creatively manipulating the stock price too much. The officers of the Class U banks would not be protected by current laws. If they cause the bank to fail or if they steal their investors money it would be legal for any citizen to kill them. Sounds harsh maybe but I think these people would perform more ethically if they knew that at any minute someone was going to put a bullet in their head, or toss them out of their private jet at altitude. We need to bring back the good old "Wanted: Dead or Alive" poster, but that is another subject.