About Those Swaptions, and the Speech that Warren Backers Keep Talking About

Elizabeth Warren is generally right with her argument that government regulation of the banks is way too weak. In spirit, I agree with her 100%. I think her crusade against appointments of ex-Wall Street employees is kind of petty, but she's right to push hard for a better regulatory system for our banks. She's right in spirit at least. Sometimes the facts get fuzzy.

Senator Warren gave a speech last week that has MoveOn and some other liberal-leaning groups crowing about a Presidential run. She called on the Senate to remove Congressman Yoder's provision to let FDIC insured banks continue doing swaptions. Actually, she pretty much said vote down the whole government funding bill because of it. She said the provision would let big banks "gamble with taxpayer money." While I agree with her on the substance of how bad this provision is, and that it should have been removed, Warren got some of her facts wrong:

The criticism has been led by Sen. Elizabeth Warren, a Massachusetts Democrat. Last week, she said Yoder’s measure “would let derivatives traders on Wall Street gamble with taxpayer money and get bailed out by the government when their risky bets threaten to blow up our financial system.”

But potential bailouts — for any bank — would almost certainly not involve general taxpayer money, even with Yoder’s amendment. 

The FDIC is funded through premiums charged to banks, not taxpayers. Additionally, FDIC insurance protects depositors. When a bank fails, FDIC money goes to account holders, not the bank.

“The Dodd-Frank Act specifically bars the federal government from spending taxpayer dollars to bail out a failed bank,” Fiscal Times columnist Rob Garver wrote Sunday.

In other words, while it's an awful, awful idea to let FDIC-insured banks do this, and it serves no good purpose, Senator Warren gives at very least leads you to an incorrect conclusion that we're going to end up bailing out the banks if (when) they screw this up again. Is she wrong to oppose this legislation? No, not at all. Is she perhaps embellishing a bit here? Yeah. Should liberals fall in love over a speech again? No, probably not. Elizabeth Warren is a fine Senator, fighting the good fight in the Senate, but don't get too carried away with the love-affair over a speech. This spending bill was not really a complete unraveling of Dodd-Frank, nor was it putting the taxpayers on the hook again to bail out the banks.

Read more here: http://www.kansascity.com/news/government-politics/article4539005.html#storylink=cpy