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A coalition of conservative New Democrats, whose leader is being investigated by a Congressional ethics committee over Wall Street fundraising, has officially come out in favor of gutting financial reform. The issue they've targeted: derivatives, the most closely watched effort of the bank overhaul. Good luck in November, guys.

New Democrats like to say they are "pro-business," but what they usually mean is, "willing to funnel federal gifts to bigwig executives." Their chair is Rep. Joseph Crowley, D-N.Y., currently under investigation by the House Office of Congressional Ethics over a fundraiser he held just days before the final House vote on the Wall Street reform package back in December 2009. Crowley is a favorite of Wall Street CEOs, who has pulled in more than $2.6 million from the finance industry over the course of his Congressional career, over 250 percent more than any other industry.

Crowley isn't the only New Dem close to Wall Street. Rep. Jim Himes of Connecticut is a former Goldman Sachs executive, Rep. Melissa Bean of Illinois has been doing big banks' dirty work for years, and New Dems score more campaign contributions from Wall Street than their regular-old-Democrat colleagues.

The new Dems are opposing the tough derivatives overhaul being pushed by Sen. Blanche Lincoln, D-Ark., known on Capitol Hill as "Section 716." The Lincoln plan is a huge blow to Wall Street profits and the first real crack in the too-big-to-fail armor worn by the nation's largest banks. The derivatives market is the risky casino that brought down AIG and Enron, and played a huge role in the inflation of the subprime mortgage bubble and necessitating the bailouts of megabanks when that bubble burst. While a little under ten percent of the market consists of risk-hedging by businesses, the remainder is a speculative nightmare.

Taxpayers actually subsidize this market by allowing commercial banks to deal derivatives. Since commercial banks have access to cheap Fed loans and FDIC-guaranteed deposits, this funding ends up feeding the global casino. If you force banks to move their derivatives operations to an independently capitalized subsidiary with no access to taxpayer perks, the market shrinks, and with it, big bank profits and bonuses.

But of course, bankers like their bonuses, and they've enlisted the New Dems to protect them. A total of 43 New Democrats are circulating a letter around Capitol Hill in an effort to defang the derivatives overhaul (interestingly, 26 New Dems have refused to sign on to this overt Wall Street sellout). Here's the key section:

"Section 716 . . . would increase systemic risk by forcing derivatives transactions into less regulated and less capitalized institutions and impede effective oversight of the derivatives markets . . . Legitimate conflict of interest concerns are addressed by the ban on proprietary trading in the Volcker rule, and, accordingly, we believe Section 716 should be removed from the legislation."

Nobody in Washington takes these claims seriously. One is a bald-faced lie, the other an effort to obfuscate other New Dem efforts to defang the Volcker Rule itself.

First, the lie. The New Dems are claiming that the Lincoln provision would push derivatives into the shadows, when, in fact, it would bring them into the light. Right now, most derivatives transactions are conducted off-balance-sheet, meaning banks don't have to disclose information about these risky deals to their investors, making it easy for them to skirt capital requirements. The idea that the Lincoln plan could actually make the derivatives market more opaque or harder to regulate than they are now is just laughable.

The Wall Street reform bill includes a set of capital rules for all derivatives trading, rules which apply to everybody who engages in derivatives activity, be they a hedge fund, a bank, or a bank-affiliate. There is absolutely no way in which Lincoln's plan would be "forcing derivatives transactions into less regulated and less capitalized institutions."

The opposite, in fact, would happen. Banks would have to put up more of their own money in order to back derivatives trades, because they wouldn't have access to taxpayer money to back them. That's why the bank lobby is fighting the Lincoln language like crazy.

The bank lobby has been pushing for weeks to secure some kind of compromise in which the Volcker Rule is substituted for Lincoln's derivatives plan. There is almost no overlap between the two proposals. The Volcker Rule bans outright gambling by banks-- Lincoln's plan is an effort to rein in gambling outside of the banking system itself.

And New Dems are also making a huge push behind the scenes to gut the Volcker Rule. As Brian Beutler has reported, New Dems Dennis Moore, D-Kan., and Gregory Meeks, D-N.Y., are part of a team that hopes to secure a giant fatal loophole allowing banks to invest up to 5 percent of their capital in hedge funds. In other words, no gambling, except when you conduct this gambling with a hedge fund. This would totally gut the purpose of the Volcker Rule. Hedge fund investments have a habit of creating absolutely massive losses—even when the upfront investment is relatively low. In the go-go years of the housing bubble, Bear Stearns put $40 million into a hedge fund to gamble on mortgages. As Mike Konczal has emphasized, when that hedge fund blew up in 2007, Bear Stearns had to payout over $3.2 billion in losses—80 times what they put into it. If that $40 million had been 5 percent of Bear's capital, the company would have been bankrupt four times over when the hedge fund went down.

The New Dems are hoping that this overt hatchet-work for the bank lobby will simply go unnoticed in the media firestorm surrounding the BP oil catastrophe and General McChrystal's inability to understand chain-of-command under a Democratic commander-in-chief.

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