"Why Financial Reform Hinges on Defusing Derivatives...
How to defuse these 'financial weapons of mass destruction,' as Warren Buffett famously called them? Start with passing a proposal by Arkansas Democrat Blanche Lincoln, known as Sec. 716 in the Senate bill, that would force U.S. banks to separate their swaps desks from their commercial businesses, said Stiglitz, of Columbia University, and former top Commodity Futures Trading Commission official Michael Greenberger.
The measure aims squarely at Wall Street. Five institutions — Bank of America (BAC), Citibank (C), Goldman Sachs (GS), JPMorgan Chase (JPM) and Morgan Stanley (MS) — control some 90 percent of the derivatives market. These banks "have to be told, ‘The risk is yours, not the American taxpayer’s,’ ” Greenberger said. “There’s no doubt that Sec. 716 will increase market discipline and will bring this $600 trillion market to a size that’s realistic. And the risks that are taken with these transactions will be cut down when [bank] shareholders or directors know that they, and not the American taxpayer, will be the lender of last resort.”
Big banks and other opponents of the Lincoln plan, including the White House, Federal Reserve Chairman Ben Bernanke and FDIC chief Sheila Bair, attack it on several grounds. The most serious of these is that it would prevent banks from serving their customers. Detractors also say the measure would push derivatives trading overseas or into unregulated parts of the market.
Neither claim holds water, Stiglitz and Greenberger said. Nothing in the legislation would prevent banks from setting up a separately capitalized affiliate for selling derivatives. What it would do is bar institutions from using federal deposit insurance and debt guarantees — a mammoth 'get out of jail' card for speculators — to subsidize their swaps business. Meanwhile, a bank’s derivatives unit would be fully regulated after it is spun out, they explained, dismissing as 'mythology' the idea that Lincoln’s plan would cause chaos in the financial sector."industry.bnet.com/financial-services/10009931/why-financial-reform-hinges-on-defusing-derivatives/