U.S. Senator Elizabeth Warren (D-Massachusetts), whose continued fights for tough Wall Street reform may prevent her from being chosen as the vice president on Hillary Clinton’s ticket, is trying to make sure that big financial firms and not taxpayers are on the hook for losses that occur from risky derivative trading.
Warren along with U.S. Sen. Mark Warner (D-Virginia), and U.S. Congressman Elijah Cummings (D-Maryland), Ranking Member on the House Committee on Oversight and Government Reform, have introduced the Derivatives Oversight and Taxpayer Protection Act in order to strengthen federal oversight of the derivatives market, which totals in the multi-trillions. Derivatives were reported by the Financial Crisis Inquiry Commission to be the center of the storm in the financial crisis.
“The only way to make sure that derivatives can never lead to a financial crisis and taxpayer bailouts again is to put in place clearer rules and stronger oversight,” Warren said. “Otherwise, big financial firms will be able to rake in billions when things go well, then come back to taxpayers with their hands out when things come crashing down.”
According to an announcement on Warren’s website, a lack of federal oversight of the derivatives market allowed firms to build up massive levels of leverage and risk, which resulted in billions of dollars in taxpayer bailouts and precipitated the crisis in 2008.
“Reckless derivatives trading at AIG helped precipitate the global financial crisis of 2008 and usher in the Great Recession. That is why Congress required stricter capital, margin, and clearing requirements for derivatives activities in Dodd-Frank. This bill builds on our financial reform efforts by improving transparency, closing gaps in regulatory oversight, and giving CFTC resources adequate to accomplish these goals,” said Warner, who is the Ranking Member of the Senate Banking Subcommittee on Securities, Insurance & Investment.
Derivatives trading has also hurt the housing market in the last year, leading to Freddie Mac taking a loss of at least $350 million in two of the last three quarters.
The Warren/Warner/Cummings bill would strengthen federal oversight of the derivatives market by authorizing the Commodity Futures Trading Commission (CFTC) to collect user fees from financial firms, similar to what the SEC does, and imposing tougher penalties on those who break the rules. The bill also aims to close loopholes for firms that are looking to go around the CFTC rules, and it creates an incentive for private parties to better assess the risk of derivatives contracts by ending special treatment for derivatives in bankruptcy.