Thought we bailed them out, Wall Street banks continue with much of their destructive behavior. Exhibit A: They hold 95% of Derivatives. How can we stop the madness?
Large U.S. bank speculation in derivatives, the very thing which caused the economic crisis of 2008, is going on more than ever. JP Morgan Chase, Citigroup, Bank of America and Goldman Sachs have some 95% of such exotic investments, with only a small percentage being held by the tens of thousands of other banks in the US. Each of the current large bank holders of derivatives were recipients of bailout funds under the TARP. [1]
The federal law (Glass-Steagall) which had prevented banks from involving themselves in such ultra-risky transactions was repealed in 1996, and its replacement was a hard fought losing battle to pass the Dodd-Frank financial reform legislation. The proposed CFTC regulations to limit the type and numbers of such positions taken by commercial banks on such financial investments are being challenged even before they are made final. [2]
One of the new items proposed to be regulated is the type, number and amounts of positions taken on West Texas Light Crude oil which is a benchmark for the international price per barrel of oil. Previously, the WTLC market was regulated in Dubai and the UK and not in the US, so speculators could do as they pleased with those oil prices and not be subject to US regulation or even US scrutiny. It is commonly agreed that speculators add as much as 40% more to the price of a barrel of oil. The proposed CFTC regulations anger large speculative investors and they have threatened lawsuits even before the regulations go into effect. [3]
One method of suppressing speculation is a financial transaction tax. Some experts say [4] that a broad series of financial transaction taxes will provide additional revenues to countries and also serve to prevent the kind of wholesale speculation in derivatives and other such exotica which gave us the world economic crisis in 2008. Taxing authorities could also provide regulators real-time information on the positions of various investors to monitor and avoid abuses.
The European Community is about to impose such a tax [5] on financial transactions to deter speculators and to raise revenues. Perhaps we in the US may do likewise.
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