Tags: bill | banks | swaps | Citi

Why Is Citigroup So Desperate?

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Wednesday, 17 Dec 2014 08:18 AM Current | Bio | Archive

Last week's ugly compromise spending bill sailed through Congress, but what was in those 1,600+ pages? It's hard to be sure — but something in there was important to Citigroup and other big banks. They pulled out their big guns to get the bill passed.

That banks would lobby for favorable legislation is no surprise, of course, but something smelled different this time. The industry's Capitol Hill friends, seeing a "must-pass" bill coming, had to choose which of their many priorities to push.

Earlier versions of the bill included seven different revisions to the 2010 Dodd-Frank financial reform law. Only one survived the House-Senate conference and moved forward: repeal of the "swaps push-out" rule. This would have required the banks to move certain derivative transactions to subsidiaries not insured by the FDIC.

Opponents charged that it would expose taxpayers to risky speculation. I think they were right. If American taxpayers are to be on the hook for the deposits of collapsing banks, it is perfectly reasonable to restrict what banks can do with the money we insure. If we let the bankers go crazy and then we get stuck with the bill, we'll have no grounds to complain when it happens.

Citigroup admitted as much after the bill passed. Their top lobbyist, Ed Skyler, said in a blog post that the rule "places additional costs on U.S. financial firms."

Yes, that's exactly right, Mr. Skyler. The costs of derivative trading SHOULD be on U.S. financial firms. It should not be on the taxpayers — but now it is. Congratulations for successfully transferring so much risk off Citi's balance sheet. I'm sure you will get a great bonus.

It wasn't just Citigroup. JPMorgan Chase CEO Jamie Dimon reportedly made phone calls to key House members as a weird Obama White House-moderate GOP partnership worked hard to give the banks what they wanted.

Here is my question. Of all the gifts Wall Street could have asked Santa to deliver, why did they pick the swaps push-out rule? Why make it the priority?

Perhaps it wasn't their priority. Could the swaps push-out may have been a smokescreen for some as-yet undiscovered provision lurking in those 1,600 pages? It's certainly possible.

Setting aside that suspicion, why is it so imperative that banks be able to trade derivatives with FDIC-insured depositor money right now? What are we missing?

I don't know, but here is a guess. The banks believe that in the next few months they will face a wave of defaults from highly leveraged U.S. shale oil and gas producers. Numerous projects are no longer viable at $60 oil, and many won't even be able to make their loan payments.

That's a problem for the energy industry — but it's also a problem for the banks. They likely can't afford to write down the value of those assets. They need to transfer bad loans off their books. Derivatives are the shell game that will let them do it.

The parallels to the 2008 subprime mortgage crisis are remarkable. Just substitute oil drillers for unemployed homeowners and everything falls in place nicely.

We know how that game ended. Will the new one end the same way? Probably, but with a twist. This time the bailouts will have an anti-radar stealth coating. We — meaning taxpayers — may never know what hit us.

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PatrickWatson
Last week's ugly compromise spending bill sailed through Congress, but what was in those 1,600+ pages? It's hard to be sure — but something in there was important to Citigroup and other big banks. They pulled out their big guns to get the bill passed.
bill, banks, swaps, Citi
553
2014-18-17
Wednesday, 17 Dec 2014 08:18 AM
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