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Senate Democrats Caving, May Roll Back Dodd-Frank Regulations

After the recent indictments of Paul Manafort and Rick Gates which included charges for bank fraud, it should be obvious there are still problems with smaller banks making loans based on sketchy collateralization.

It’s right there in the indictments.

After reading about the recent relationship between bank fraudster Rick Gates, an identity monitoring company, and one of the biggest credit monitoring firms, it should be obvious there’s no daylight between bank fraud and other consumer financial products.

It’s right there in publicly filed records and marketing statements.

After reading about Donald Trump’s and Jared Kushner’s repeated real estate development failures, whether he borrowed the money from investment banks (Bear Stearns in 2006, in Trump’s case; Citigroup and Deutsche Bank recently, in Jared’s) or whether he licensed his brand while managing failing properties (Taj Mahal casino, Puerto Rico golf course, Panama condos, etc. failing after 2008), it should be obvious the underlying threats setting 2008’s economic crash in motion didn’t end after Dodd-Frank regulatory reform was passed. (Goodness knows Trump and Kushner aren’t the only failures, just the most well-known.)

Again, all of this is public record.

Which is why it is absurd that Democratic Senators are caving in and rolling back Dodd-Frank regulatory reforms with S.2155, the Economic Growth, Regulatory Relief, and Consumer Protection Act.

Do community banks need some relief from the additional expenses of compliance? Perhaps — but how does rolling back part of Dodd-Franks ensure that bank frauds like Rick Gates and Paul Manafort are stopped? Something isn’t working; the answer may be more, not less regulation.

Do Too-Big-To-Fail banks need to ensure they can’t crash the economy by virtue of their size? Sure, but what has been done to prevent more piecemeal failures like those Trump’s circle exemplify?

The capper? The CBO score on this bill sucks:

– The bill would increase federal deficits by $671 million over the 2018-2027 period
– And “would increase the likelihood that a large financial firm with assets of between $100 billion and $250 billion would fail.”

Read this piece by Mike Konzcal, Why Are Democrats Helping Trump Dismantle Dodd-Frank?

Also Matt Yglesias at Vox, and Molly Hensley-Clancy at BuzzFeed — the latter points out voters want more regulatory control on banks, not less.

See also Indivisible’s backgrounder-explainer and @Celeste_P’s call script on S.2155.

And then call your senators and tell them to vote against S.2155, then come up with a better solution to help community banks. Enlist friends and family to make calls; this bill is expected to go to a vote late today or first thing in the morning.

You might also point out to Senate Dems if smaller community banks fail because of Trump’s policies and his circle’s kleptocracy, it’ll be on them for aiding and abetting Trumpian nonsense when they are up for re-election.

EDIT: I forgot you may not have this phone number memorized as I do —

US Capitol Switchboard (202) 224-3121

Make the calls now!

[US Oil Fund ETF via Google Finance]

The Curious Timing of Kushner’s visit to KSA and the U.S.’ EITI Exit

Trump’s son-in-law Jared Kushner — he of the shaky memory and a massive debt in need of refinancing — met with Crown Prince Mohammed bin Salman within the same week the U.S. withdrew from an anti-corruption effort and Saudi Arabia cracked down on corruption. What curious timing.

Let’s look at a short timeline of key events:

Tuesday 24-OCT-2017 — Saudi Arabia’s Crown Prince Mohammed bin Salman helms a three-day business development conference at the Ritz-Carlton in Riyadh, referred to as “Davos in the desert.” Attendees include large investment banks as well as fund representatives; one of the key topics is the impending IPO for Saudi Aramco.

Wednesday 25-OCT-2017 — Jared Kushner departed for an unpublicized meeting with government officials in Saudi Arabia.

Wednesday 25-OCT-2017 — Treasury Secretary Steve Mnuchin and Undersecretary for Terrorism and Financial Intelligence Sigal Mandelker traveled separately from Kushner to participate in bilateral discussions, which included the memorandum of understanding with the Terrorist Financing Targeting Center (TFTC). The U.S. and Saudi Arabia chair the TFTC while Gulf States form its membership.

Friday 27-OCT-2017 — Reports emerged that at least one Trump campaign team will be indicted on Monday.

Monday 30-OCT-2017 — Jared Kushner met with Crown Prince Mohammed bin Salman, discussing strategy until 4:00 am. News reports didn’t indicate when exactly Kushner arrived or when discussions began. (Paul Manafort, Rick Gates, George Papadopolous were indicted this day, but not Kushner; good thing “excellent guy” Papadopolous as a former Trump campaign “energy and oil consultant” wasn’t involved in Kushner’s work with Saudi Arabia, that we know of.)

Thursday 02-NOV-2017 — U.S. Office of Natural Resources Revenue sent a letter to the Extractive Industries Transparency Initiative (EITI), a multinational effort to reduce corruption by increasing transparency around payments made by fossil fuel companies to foreign governments. The U.S. had been an implementing member since 2014.

Saturday 04-NOV-2017 — At 7:49 am EDT, Trump tweets,

“Would very much appreciate Saudi Arabia doing their IPO of Aramco with the New York Stock Exchange. Important to the United States!”

Saturday 04-NOV-2017 — (approximately 5:00 pm EDT, midnight Riyadh local time) At least 10 Saudi princes and dozens of government ministers were arrested and detained under what has been reported as an anti-corruption initiative. Prince Alwaleed Bin Talal, a critic of Trump and a tech industry investor of note, was among those arrested this weekend.

Saturday 04-NOV-2017 — At 11:12 pm EDT Reuters reported Trump said he had spoken with King Salman bin Abdulaziz about listing Saudi Aramco on the NYSE. The IPO is expected to be the largest offering ever.

But wait…there are some much earlier events which should be inserted in this timeline:

Friday 03-FEB-2017 — Using the Congressional Review Act to fast track their effort, Senate passes a joint resolution already approved by the house, disproving the Securities and Exchange Commission’s Rule 13q-1, which implemented Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Section 1504, the bipartisan product of former senator Richard Lugar and Sen. Ben Cardin (now ranking Democrat on the Foreign Relations Committee),

“…a public company that qualified as a “resource extraction issuer” would have been required to publicly disclose in an annual report on Form SD information relating to any single “payment” or series of related “payments” made by the issuer, its subsidiaries or controlled entities of $100,000 or more during the fiscal year covered by the Form SD to a “foreign government” or the U.S. Federal government for the “commercial development of oil, natural gas, or minerals” on a “project”-by-“project” basis. Resource extraction issuers were not required to comply with the rule until their first fiscal year ending on or after September 30, 2018 and their first report on Form SD was not due until 150 days after such fiscal year end.” (source: National Law Review)

Section 1504 and SEC rule 13q-1 enacted the U.S.’ participation in the EITI’s anti-corruption effort.

Monday 13-FEB-2017 — Trump signed the disproving resolution. (Probably just another coincidence that Michael Flynn resigned this day as National Security Adviser.)

From the earliest days of this administration, both the Trump White House and the GOP-led Congress have been ensuring that extractive industries including oil companies will not be accountable for taxes, fees, and other miscellaneous payments (read: dark money donations and bribes, the latter being a bone of contention to Trump) paid to foreign governments.

Some of the immediate beneficiaries are Exxon Mobil, for which Secretary of State Rex Tillerson used to work, and the Koch brothers, among U.S. oil companies which claimed additional reporting requirements under Rule 13q-1 would make them less competitive with overseas oil producers.

What’s not yet clear: How is this reduced openness supposed to help track financing of terrorism, which Treasury was supposed to be working on?

What of transparency related to arms deals involving Saudi money or Aramco? What of transactions between U.S. oil companies and other foreign companies involved in deals with Russian fossil fuel firms like Gazprom?

Can Trump, Jared Kushner, their family and minions, and members of Congress profit from this increased lack of transparency?

What happens to the U.S. and global economy when oil prices rise without adequate transparency to the market to explain price increases?

Also not yet clear: what happened to the 19.5% stake in Rosneft sold last year, allegedly bought by Qatar’s sovereign wealth fund and Glencore (the same Glencore now embroiled in Paradise Papers scandal)? This massive chunk of Russia’s largest oil company has increased in value in tandem with crude oil’s rise, especially since the Saudi crackdown on Saturday. What’s to keep this massive amount of Rosneft shares from being laundered through stock markets as Deutsche Bank did between 2011 and 2015?

It’s all just so curious, the unanswered questions, the odd timing: Aided and abetted by GOP-led Congress, Trump pulls out of an anti-corruption initiative while Treasury Department appears to work on anti-corruption, and Kushner meets on the sly with the Saudi crown prince just days before an anti-corruption crackdown.


The Challenge To Richard Cordray Not Being Discussed

The internets are alive with the sound of excitement over the appointment today by President Obama of Richard Cordray to be Director of the Consumer Finance Protection Bureau (CFPB). And, as Brian Buetler correctly points out, by doing it today, the first day of the new legislative session, Obama (assuming he gets re-elected) has provided Cordray with the longest term possible to serve as a recess appointee:

By acting today, with session two of this Congress technically under way, Obama has given Cordray the rest of this session and the full next session of the Senate to run the bureau. Cordray could potentially serve through the end of 2013.

The Congressional Research Service outlined this in a recent report (PDF) — and the White House and Senate leaders of both parties confirm the analysis.

If Obama loses in 2012, that could shorten Cordray’s tenure — and of course Cordray can leave early if he wants to. But this move makes it much more likely that the CFPB will truly take root.

Most of the banter so far has been on the viability of Obama’s move to recess appoint in this manner. I have looked at this issue for years, going back to early in the Dawn Johnsen imbroglio, and find no reason to believe this was not a proper exercise of Presidential power and prerogative.

The long and short of it is, there is no restriction on timing of recess appointments by a President pursuant to Article II, Section 2 of the Constitution. Both the “10 day rule”, which got narrowed to the “3 day rule” were practices and, at best were based on non-binding dicta from an early 90s DOJ memo; they are not now, nor have they ever been, binding law or rule. Legally, they are vapor. The issue was actually litigated in the 2004 11th Circuit case of Evans v. Stephens.

And when the President is acting under the color of express authority of the United States Constitution, we start with a presumption that his acts are constitutional.2 See United States v. Allocco, 305 F.2d 704, 713 (2d Cir. 1962) (Recess Appointments Clause case); see also U.S. v. Nixon, 94 S.Ct. 3090, 3105 (1974) (observing “In the performance of assigned constitutional duties each branch of the Government must initially interpret the Constitution, and the interpretation of its powers by any branch is due great respect from the others.”).
The Constitution, on its face, does not establish a minimum time that an authorized break in the Senate must last to give legal force to the President’s appointment power under the Recess Appointments Clause. And we do not set the limit today.

And there you have it. There is no minimum time. Also, somewhat significant, is that Evans was decided by the full 11th Circuit, not a three judge panel, and SCOTUS considered a full cert application, and denied it, leaving the 11th Circuit decision standing as good law and citable precedent.

Oh, and if you wonder if SCOTUS has a real hard on for Presidential recess appointments, the answer would appear to be no. During the oral argument in New Process Steel v. NLRB last year, Chief Justice Roberts scoldingly asked Deputy Solicitor General Neal Katyal “And the recess appointment power doesn’t work why?” I am not sure the blustering Republicans like McConnell and Boehner will find quite as receptive an ear from the Roberts Court as they think.

Well, as Beutler notes, things should be all rosy and good to go for Cordray and CFPB, right? Not so fast, there is another issue not receiving any attention by the chattering classes.

The CFPB was promulgated by a pretty bizarre act – The Dodd Frank Act – bizarre, specifically, in how it structures and empowers the CFPB in its various duties. Notably, several of the key powers flow not necessarily through the agency, but through the “confirmed director” of CFPB. If there is no director, the bureau is run in the interim by the Treasury Secretary. Yep, good ‘ole Turbo Tax Timmeh Geithner. Specifically, Section 1066 provides:

The Secretary is authorized to perform the functions of the Bureau under this subtitle until the Director of the Bureau is confirmed by the Senate in accordance with section 1011. (emphasis added)

So, in all this meantime, and despite the White House trying to put the patina on that Liz Warren was running the CFPB, it has actually been Geithner. And the problem with this has been (remember I said the enabling language was bizarre??) that not all of the full powers of the CFPB vest, nor can they be exercised, until there is a director.

A director “confirmed by the Senate” according to the literal wording of the Dodd Frank Act.

If I were speculating on legal challenges to Cordray, rather than focusing solely on Obama’s ability to so appoint him (which, again, I think stands up), I might be more concerned about the issue of whether Cordray has full powers to lead and operate CFPB because he is not “confirmed by the Senate”. That should be a stupid argument you would think, but the words “confirmed by the Senate” in the enabling act make it at least a very cognizable question.

Normally a confirmed appointee and a recess appointee have the same legal authority and powers but, to my knowledge, there is no other situation in which substantive power for an agency flows only through its specific “confirmed” director. If I were going to attack Cordray, I would certainly not restrict it to the propriety of Obama’s recess appointment, I would also attack his scope of authority since he was not “confirmed”. I would like to think such a challenge fails, but Congress sure left a potential hidden boobytrap here.

US Bank Plans to Make Up Profit on Swipe Fees by Screwing the Unemployed

The other day I summarized a National Consumer Law Center report showing how some banks–particularly US Bank and JP Morgan–are screwing those who receive unemployment funds on debit cards with exorbitant fees. WSJ did a story on the report, too, with this appalling detail.

Banks are barreling into the business, led by J.P. Morgan Chase & Co., the second-biggest U.S. bank in assets, which has contracts with 21 states. U.S. Bancorp, based in Minneapolis, has contracts with 16 U.S. states. The nation’s largest bank by assets, Bank of America Corp., has deals in five states and will start issuing debit cards for California’s unemployment benefits in July.

One reason why financial institutions like prepaid debit cards: They largely escaped the recent crackdown by U.S. lawmakers and regulators on fees, interest rates and billing practices for credit and debit cards.

Last year, 10 state treasurers successfully prodded lawmakers to shield prepaid debit cards from part of the Dodd-Frank financial-overhaul law that limits so-called “swipe fees” charged to retailers. Prepaid debit cards also are exempt from a 2009 law that outlawed fees for infrequent card use. In addition, most of those cards aren’t subject to Federal Reserve rules requiring debit-card users to agree before banks can charge them for overdrawing the balance in their account.

Richard Davis, U.S. Bancorp’s chairman, president and chief executive, said last month that prepaid debit cards and other products will help the company recover roughly half of the revenue likely to be lost from swipe-fee rules being written by regulators. The banking industry is lobbying to repeal or delay the rules.

That is, US Bancorp (which the report showed was charging overdraft fees up to $20) plans to make up what it’ll lose in profits if swipe fees in Dodd-Frank remain in the law by screwing the unemployed even worse.

No wonder the bankster bailouts aren’t leading to any new jobs: they’re using the unemployed as a captive profit center.

JP Morgan Chase Nickel and Diming the Last Nickels and Dimes from the Unemployed

The National Consumer Law Center just released a report on something that’s been a pet peeve of mine for some years: states’ increasing reliance on pre-paid cards to distribute unemployment compensation, rather than checks. (h/t Susie) As the report explains, issuing funds via a card is much cheaper for the states. But what’s really happening is that unemployment recipients end up paying for the cards out of series of fees the banks issuing the cards charge (which violates the law that says administrative costs should not come out of benefits).

The report spells out in detail how banks are screwing unemployment recipients in which state:

  • US Bank refusing to let AR post its fee schedule
  • PNC requiring recipients to work with customer service to transfer fees to their own bank account in IN
  • Chase charging $1 for the very first in-network ATM withdrawal in TN
  • Chase charging $2.75 for out-of-network ATM withdrawals in WV, even in areas without convenient access to a Chase branch
  • Chase charging $.25 for cash back with a purchase in TN and RI
  • Chase charging $.10 for every point-of-service use after the second one in CO
  • Chase charging $.25 for PIN transactions in ME and TN
  • US Bank charging $20 overdraft fees (on pre-paid cards!) in AR
  • Chase charging $1.50 for denied transactions in MI and WV
  • Chase charging $.50 to check a balance and $1 for insufficient funds in RI
  • Regions Bank charging a $2.50 90-day inactivity fee in AL
  • Chase charging $12.50 to issue a check to close out an account in CO and CT

Check out this state-by-state summary to see what your state’s card charges and how that compares with other states.

This list, of course, demonstrates another thing: Chase’s significant role in the market (it serves 13 of the 40 states that use pre-paid cards) and–aside from US Bank’s egregious overdraft fees–its use of the most abusive practices.

That’s notable because Chase’s parent company–and its CEO, Jamie Dimon–is also taking the lead in threatening to cut off poorer consumers because the government wants to limit what debit card issuers like Chase can charge merchants.

Bank executives have said they will raise their fees to compensate for losing debit card processing revenues.They predict that some people will be unable to afford the fees, forcing them out of the banking system into the realm of check cashers and payday lenders.

The term that the banks use for this is “unbanked.” The rules “will have the adverse consequences of making a portion of current bank clients unbanked.

You will not be able to profitably serve them,” Dimon told analysts during the bank’s fourth-quarter earnings conference call Friday.

About 5 percent of today’s banking customers “may be pushed out of the banking system,” he said.

You see the nice trap Dimon is setting for those who don’t profit mightily by sucking at the federal teat, like his bank does? Unbanked consumers are precisely those who, if they receive unemployment, will rely on these cards and have to pay their usurious fees. So after forcing them out of the banking system because JP Morgan refuses to cut its escalating profits in response to Dodd-Frank, JP Morgan will still profit off these people by nickel and diming them at the time they can least afford to be nickel and dimed.

Michael Barr–Liaison on Foreclosure Fraud Investigation–Leaves Treasury

Just one week ago, Iowa’s Attorney General Tom Miller told Chris Dodd that Assistant Secretary of the Treasury for Financial Institutions Michael Barr was the key person from Treasury working with the Attorneys General investigation into foreclosure fraud.

Miller: We haven’t had any contact with the [Financial Stability Oversight Council]. We have had repeated contact with the Department of the Treasury, with Assistant Secretary Michael Barr and his staff. We’ve developed a terrific ongoing relationship with them. We talk about these issues and try and help and support each other on these issues. So we’ve had a lot of discussions with Treasury but not with that particular Council.

That’s funny. Because Barr is leaving Treasury. Imminently.

Diana Farrell, deputy director of President Barack Obama’s National Economic Council, and Assistant Treasury Secretary Michael Barr are leaving the administration, adding to the turnover in the ranks of the White House economic team that worked on the government’s response to the worst financial crisis in more than 70 years.

Farrell will leave by the end of the year and Barr’s last day at Treasury will be Dec. 3. Both played key roles in shaping Obama’s financial regulatory overhaul plan, which was signed into law in July.


Treasury spokesman Steve Adamske said Barr would continue his academic career at the University of Michigan in Ann Arbor.

(Note, Barr is not currently listed as teaching next semester.)

In addition to working with the Attorneys General “investigating” the banksters’ foreclosure fraud, Barr had been considered a leading candidate–after Elizabeth Warren–to lead the Consumer Finance Protection Board and/or the Office of the Comptroller of the Currency (the agency that regulates the big banks) and (as the Bloomberg piece makes clear) had a key role in Dodd-Frank.

As you recall, the same day that Tom Miller told Dodd he was working closely with Barr, at almost the moment when Miller said the investigation would take months, sources that sounded an awful lot like the banks were suggesting a deal on the “settlement” ending the “investigation” was close. But even that article didn’t seem to suggest it’d be done by December 3.

Also note, the Financial Stability Oversight Council–the entity set up by Dodd-Frank to stave off systemic crises–meets on Tuesday; they promise to address efforts so far on the foreclosure fraud problem.

The group will provide an update on what various agencies are doing to investigate widespread paperwork problems that have called into question millions of foreclosures across the country, as well as how regulators are coordinating with the Justice Department, state attorneys general and other officials scrutinizing the mess.

Mind you, I don’t know what Barr’s departure means. But I find it notable that–after recently being floated for key positions going forward and given his role in efforts to respond to the foreclosure mess–he is leaving now.

Expect Our Banana Republic-Like Access to Justice to Get Worse

Not long ago, an independent group showed that the access to justice for the average American rivaled that of a banana republic. And no one is making much of an effort to fix that problem. As DDay reported last week, while the Dodd-Frank bill authorized $35 million to support legal services, no one has appropriated it (and the folks about to take over the House aren’t likely to do so anytime soon).

Unfortunately, the one guy in the Obama Administration tasked to do something about that problem, Lawrence Tribe, is about to leave.

After nine months as the Justice Department’s “senior counselor for access to justice,” Laurence H. Tribe, a prominent Harvard law professor and mentor to President Obama, will leave his position and return to Massachusetts early next month.


During Mr. Tribe’s brief tenure, he traveled around the country meeting with judges, prosecutors, public defenders, and legal aid workers, in an effort to find places where access to the justice system could be improved for ordinary people. He said he was pleased with the ways his office had found “to create a much more energized network, even though the problems are pervasive and cannot be transformed overnight.”

In partnership with other agencies, Mr. Tribe’s office pushed programs to increase training and collect more data about indigent defense, use the Internet to expand legal services to poor people in rural areas, strengthen legal services for victims of domestic violence, and expand mediation as an alternative to lawsuits for people involved in foreclosures.

Mind you, Tribe is not leaving because he’s disgruntled with the Administration. Rather, he’s returning to get medical care for a problem that has recurred.

Still, at a time when one of the only forces keeping the banksters from running roughshod over the private property of a bunch of real people is a bunch of legal services lawyers, the loss of Tribe comes at a terrible time.

Chris Dodd Uses Hearing to Call on Geithner to Do His Job

Chris Dodd didn’t have many questions in yesterday’s hearing on the foreclosure crisis. But he did use the opportunity to call on Tim Geithner to convene the Financial Stability Oversight Council to prevent this crisis from blowing up the economy.

Dodd: Attorney General Miller, at the outset of my opening comments I talked about the importance of getting the, this Financial Stability [Oversight] Council that we established in the Financial Reform Bill to anticipate systemic risk and to collectively work as a body chaired by the Secretary of the Treasury, along with the FDIC and the OCC–there are ten members of that, an independent member and five others that are part of it. This seems to me like a classic example–one that we did not anticipate necessarily when we drafted the legislation, but exactly, we are in a crisis with this. Now you can argue that it’s not yet a systemic crisis that poses the kind of risk we saw in the Fall of 08, but no one can argue that we’re not in the middle of a crisis. Now the idea of this, of course, was to minimize crises so they don’t grow into a large, systemic crisis. Have you had any contact with the Secretary of Treasury? Or is there any communication going on between the Attorney Generals and this Council or the Chairman of it, the Secretary of the Treasury, or their office, to begin to talk about what the role of the federal government might be in formulating an answer to all of this?

Miller: We haven’t had any contact with the Council. We have had repeated contact with the Department of the Treasury, with Assistant Secretary Michael Barr and his staff. We’ve developed a terrific ongoing relationship with them. We talk about these issues and try and help and support each other on these issues. So we’ve had a lot of discussions with Treasury but not with that particular Council.

Dodd: Again I saw [mumble] privately with Senator Warner and others may, Senator Merkley has a similar thought. I’m going to use this forum here, obviously in a very public setting, to urge the Secretary of Treasury and others to convene that Council to begin to work with you and others, so there is a role here to examine this question in seeking broad solutions. So my hope is they’ll hear that request to pick up that obligation that we laid out in that legislation.

You know, when the Chairman of the Senate Banking Community has to use a forum like this to try to remind the Secretary of Treasury of his obligation under Dodd-Frank, it does not inspire a lot of confidence.

The (Liz) Warren Commission and Financial Reform

A lot of hope was placed on the back of Elizabeth Warren and the financial reform act passed by Congress at the behest of the Administration formally known as the Dodd-Frank Wall Street Reform and Consumer Protection Act. Concurrent with belittling the liberal Democratic activist base as ungrateful whiners, the Administration and Democratic leadership has touted Liz Warren and Dodd-Frank as prime examples of accomplishments that should thrill and satisfy the base. But are those “accomplishments” really all that and should they mollify Democrats, at least on financial reform issues? The initial returns indicate no.

First, the ability of Dodd-Frank to do the job intended as to rapacious financial institutions is highly debatable at best, and that is being generous. It is already established the bill did not clamp down sufficiently on the reckless casino style trading in derivatives and synthetic financial products, and may even have opened a new portal for abuse by the Wall Street Masters of the Universe high frequency traders.

Gretchen Morgenson in today’s New York Times lays out beautifully the bigger picture on the lack of reform in the “reform”:

THE government is pulling a sheet over TARP, the Troubled Asset Relief Program created during the panic of 2008 to bail out the nation’s financial institutions. With the program’s expiration on Sunday, we can expect to hear lots of claims from the folks at the Treasury that it was a great success.

Such assertions would be no surprise from a political class justifiably concerned about possible taxpayer unhappiness, the continuing economic turmoil and the midterm elections. But if we have learned anything during this crisis, it is that the proclamations emanating from the Washington spin machine must be taken with an extra-hefty grain of salt.

Consider the claims made last summer that the Dodd-Frank financial reform act reduces the threats that large, interconnected banks pose to taxpayers and the economy when the banks are deemed too big to fail. Indeed, as regulators hammer out the rules governing derivatives transactions, it’s evident that the law has created a new set of institutions that will almost certainly be deemed too important to fail if they ever get into trouble. And that means there won’t really be an effective way to keep those firms from taking big, profitable, short-term risks that are dumped on the taxpayers when the bets fail.

Our roster of bailout candidates includes the clearinghouses, created under Dodd-Frank, that are meant to increase the oversight of derivatives trading. Because most derivatives transactions are expected to go through these clearinghouses, they will be “systemically important” under the law. As such, Dodd-Frank specifically provides that “in unusual or exigent circumstances,” the Federal Reserve may provide such entities with a financial backstop, including borrowing privileges.

Remember this: Financial backstop is just another term for a taxpayer bailout. And the major banks and brokerage firms are the members of the clearinghouses, so a backstop would essentially be for them.

According to the Bank for International Settlements, the entire derivatives market had a gross credit exposure of $3.5 trillion at the end of 2009. Obviously, even a small fraction of that amount could represent a sizable call on the taxpayers if a clearinghouse hit the skids.

So much for eradicating too-big-to-fail.

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