Derivatives Vote in Key Senate Committee Strikingly Conforms to Economy Watch Scenario

April 21, 2010Marketsby David Caploe

Derivatives Vote in Agricultural Committee

By David Caploe PhD, Chief Political Economist,

It's far too early to say anything definitive, of course, but we couldn't help but be struck by how quickly major structural elements of

By David Caploe PhD, Chief Political Economist,

It's far too early to say anything definitive, of course, but we couldn't help but be struck by how quickly major structural elements of

our analysis of the political impact of the Goldman / SEC fraud case have already been confirmed by unfolding events in Washington.

Let's re-call quickly the scenario we laid out yesterday about how this seeming confrontation might turn out to be less than meets the eye:


Having seen he got nowhere with the Republicans and their corporate handlers in the various “health” industries when it came to health care “reform” –

Obama realizes he has to ramp up the “community organizer / tough Chicago pol” aspect of his admittedly multi-faceted personality, dump the “bi-partisan” nonsense that has clearly failed, and play a little hardball

IF he has any hopes of getting through the Senate even the – in our view, totally weak-kneed and inadequate – financial “reform” he is proposing.

Put bluntly, given the Senate Republicans’ seeming 41-vote solidarity AGAINST him, he has to give the Senate Democrats SOME kind of stick with which to cleave away at least a few Republicans,

not to validate the “bi-partisan” foolishness, but simply to make sure that SOME kind of bill DOES pass.

In this view, at least APPEARING to take on Goldman – even with an admittedly weak legal case – will be enough to make some “moderate” Republicans –

especially those who are up for election this November,

and don’t want to appear to be TOTALLY bought-and-paid-for by the same Wall Street gang

whose shenanigans have brought the lending freeze and consequent unprecedented unemployment to Main Street

go along with what is, after all, a not-especially tough “reform,”

which, in the end, their corporate patrons are going to have few problems getting around, given their well-paid and ingenious legal advisers.


Imagine our edification, then, when we saw this New York Times story about a crucial vote Wednesday on DERIVATIVES in the Senate Agricultural Committee  -

which, for all sorts of arcane reasons, has jurisdiction over those crucial financial instruments,

in the same way the appropriate regulatory agency for them is the Commodities Futures Trading Commission -

that conformed almost exactly to the scenario we laid out above ;-).

Republican Senator Charles E. Grassley of Iowa voted Wednesday in favor of a measure requiring tough regulations on the market for derivatives,

the complex financial instruments that were behind much of the breakdown in financial markets two years ago.

He was the lone Republican to side with Democrats on the Agriculture Committee in approving a bill that will now be folded into the larger financial overhaul measure.

Mr. Grassley, who is up for re-election this year, said in a statement that his vote did not mean that he would support the larger bill,

which he noted had “a number of flaws that need to be resolved before I’d support it.”

Nevertheless, his decision to side with the Democrats underscored the potential political peril for Republicans in opposing tighter rules for Wall Street,

at a time of public frustration over the return of huge earnings and blockbuster bonuses

even as unemployment remains high and recovery limps along in much of the country.

So there we have the "moderate" Republican / up for re-election / not wanting to appear to favor Wall Street over Main Street / part of the formula.

But that's only the beginning of how these key events yesterday in Washington conformed to our analysis.

We also said the following about what might constitute real "change" on this whole question of re-asserting some kind of common-sense political control over Wall Street:


If there is a substantive change in the nature of the "financial reform" being proposed,

the least of which is to, as Senator Blanche Lincoln seems to want, either ban complex derivatives or make them COMPLETELY transparent


then we may start to believe there really IS going to be a change.


Imagine, therefore, our further delight when we read THIS about the substance of the issue on which Grassley joined the 12 Democrats on the committee:


The Agriculture Committee voted 13-8 to approve the bill, which was sponsored by Senator Blanche Lincoln of Arkansas, the committee chairwoman.

The bill would require most derivative contracts to be traded on a public exchange,  

and to be processed, or cleared, through a third party to guarantee payment if one of the traders went out of business.

It also would require most big banks and Wall Street firm to put their derivatives trading business into a separate subsidiary ...

And this, of course, is precisely the Pandora's Box aspect we referred to in BOTH the title AND the body of the article yesterday,

when we said:


This [could] represent a radical change in what has heretofore been Obama’s continuation of Cheney / Bush policies towards Wall Street and the whole TBTF sector of the American political economy


So now we have TWO of the major components of what we argued were the key elements of this complex and dynamic situation.

And here comes the THIRD, which directly follows the elipsis at the conclusion of the quote just above from this crucial Times story :

It also would require most big banks and Wall Street firms to put their derivatives trading business into a separate subsidiary ...

a move opposed by the banks as well as the Obama administration.

And that, of course, is the kicker in the entire situation that made us so doubtful the whole Goldman / SEC "confrontation" was what it seemed at first sight to be:

the fact the Obama administration JOINED the banks in OPPOSING the structural separation - a firewall, if you will - between banks' derivatives trading and the rest of their activities -

much like the equally structural wall between boring but solid commercial banking and the more lucrative but speculative activities

enshrined in the Depression-era Glass-Stegall Act that was - in case you've forgotten -

enthusiastically dismembered by the Clinton Administration in 1999

with the active participation of now-National Economic Council head Larry Summers and now-Treasury Secretary Tim Geithner,

under the direction of their common patron, Robert Rubin, Summers' immediate predessor as Clinton Treasury Secretary, before he left to become the eminence grise at Citibank.

And that, of course, was PRECISELY the reason for our skepticism whether Team Obama was, in fact, genuinely committed to "change" when it came to Wall Street:


We still remain dubious such a change is going to come as long as the President retains Larry Summers and Tim Geithner as his key economic policymakers,

given, as we have discussed numerous times, Geithner’s complicity in the Black September 2008 meltdown, and their joint “unshackling” of derivatives during the final moments of the Clinton administration.


Now obviously, this story is far from over, and there will be many more steps along the way until it reaches whatever conclusion may eventuate.

But we're sure you'll agree it is rather striking to see three of the main components of our analysis

so vividly and strikingly illustrated by significant events in Washington barely 24 hours after we published it.

Stay tuned, as they say on tv - MUCH more to come.

A Happy 4/20 Indeed !!!


David Caploe PhD

Chief Political Economist

President /

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