sábado, 13 de diciembre de 2014

sábado, diciembre 13, 2014
Heard on the Street

Big Banks’ Derivatives Horse Trade

Longer-Term Costs Accompany Legislative Maneuver

By David Reilly     

Dec. 10, 2014 4:58 p.m. ET

The backrooms may not be filled with smoke anymore, but deals struck in them still leave a foul odor. The latest example: a change to rules on big banks’ holdings of derivatives inserted into spending legislation meant to avoid a government shutdown.

The change, if adopted, would repeal a provision in the Dodd-Frank Act designed to force big banks to push some derivatives contracts out of their insured banking subsidiaries into separate affiliates. The aim was to reduce the risk the bank subsidiaries pose to taxpayer-backed deposit insurance. The amendment is reportedly coming at the behest of big banks with the main beneficiaries being Citigroup , J.P. Morgan Chase and Bank of America .
     
It would be easy for investors to surmise this will be good for the banks’ bottom lines. That may be the case, at the margin, although it will take a lot more than this to improve Citi’s prospects and valuation, for example. And due to previous successful attempts to water down this provision, it only affects about 5% of big banks’ derivatives portfolios.

But the change would be bad for taxpayers and investors more broadly if it indeed makes the financial system more beholden to the big banks. It could also make bailouts more likely.

Banks and their proxies have argued there are sound reasons for the move. For instance, some have said the derivatives push-out isn’t needed due to the Volcker rule’s constraints on proprietary trading. This may be so—or not. Because banks have chosen to try and slide this through the legislative back door, investors and taxpayers won’t have the chance to hear meaningful debate on the issue.

That will reinforce the notion among the public that Wall Street can’t be trusted and will always try to rig the game in its own favor. The long-term cost of perpetuating that perception may well outweigh any short-term gains banks reap from this legislative maneuver.

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