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Congratulations chumps! You are now on the hook for $303 Trillion in Derivatives

Burgess COMMENTARY

Peter Burgess

Congratulations chumps! You are now on the hook for $303 Trillion in Derivatives bygjohnsitFollow Before Glass-Steagall was repealed in 1999, Wall Street was on the hook for bad bets with derivatives. During the real estate bubble the taxpayer was on the hook for these casino chips. Then came the 2008 meltdown and Dodd-Frank was pushed through. The taxpayer was off the hook for six years. But now Congress rolled over for Wall Street and the taxpayer is on the hook again.

Bank of America, for example, transferred its derivatives business from a Merrill Lynch subsidiary to Bank of America's own government-backed depository institution, meaning losses on those derivatives could be covered by taxpayers.

Under the language attached to this week's omnibus spending bill -- which was negotiated with bipartisan support -- the proposed rules would be eliminated before they were set to take effect, meaning other financial institutions could follow Bank of America's lead. Critics say that could put taxpayers on the hook for future losses that come from derivative trades that they say are too risky to be guaranteed by the public.

First of all, let's look at how this came to be.

A Mother Jones article back in May showed us all how this legislation was written.

That's right - they didn't even bother to change the wording. That's how corrupt our Congress is.

Now let's look at how big of a pile of liabilities you've inherited.

Why might this be a problem? Derivatives allow banks and investors to make bets on the performance of assets such as stocks, bonds and currencies without putting much money down. Such leveraged positions can quickly generate big gains or losses, and can trigger sudden, large demands for added cash collateral -- events that are not particularly desirable for institutions crucial to the functioning of the economy. To be sure, the banks typically provide a sort of bookmaking service, taking bets that more or less cancel each other out. But not always: JPMorgan lost more than $6 billion on credit derivatives bets in 2012, and several big banks -- including Goldman Sachs and Citigroup -- required a government bailout after insurance giant AIG couldn't meet collateral demands on its souring mortgage bets in 2008.

Those Wall Street banks can now use federally-insured deposits and use them as collateral against derivative gambles/bets. Heads they win, tails we lose.

This is just one reason why I didn't like Dodd-Frank.

Dodd-Frank was a massive regulation package that didn't define exactly what the regulations would be, nor did it address the fact that our regulators were completely captured.

Glass-Steagall wasn't regulation, it was reform. It broke up the banks. No rider on a budget bill could have overturned that.

3:00 PM PT: I should clarify: You aren't on the hook for all that money yet. What the bill has done is allowed the banks to put you on the hook for it using the method I mentioned above. Of course they would be able to lower their risk and thus interest payments by doing so, so they would be insane not to do it (they lobbied for it after all), but for the moment you aren't on the hook for it.