Arkansas Senate primary could cost Wall Street over $100 billion

by: Chris Bowers

Wed Jun 09, 2010 at 19:00


Even as labor is being scolded by the White House for spending $10 million on the Arkansas Senate primary, it has gone relatively unnoticed that the primary could end up costing Wall Street one thousand times as much money (literally).

Blanche Lincoln's derivatives language in the Wall Street reform bill forces banks to spin off their derivative trading sections. If it becomes law, it will cost Wall Street banks billions and billions of dollars:

Goldman Sachs could lose up to 41 percent of its earnings if Congress approves tighter regulation of the derivatives market, according to an analysis by Bernstein Research. That's equivalent to wiping away $3.9 billion in Goldman's earnings this year if the stricter regulations were in effect for the entire 12 months, according to a subsequent analysis of the numbers by DealBook using Bernstein's 2010 earnings-per-share estimates.

Other major banks, including Citigroup, Morgan Stanley, JPMorgan Chase and Bank of America, would also withstand cuts of  billions of dollars in their earnings if the derivatives rules currently being considered by the Senate are put in place.


Those estimates are only over the course of one year, too.  Over the course of a decade, Lincoln's language could end up costing Wall Street over ONE HUNDRED BILLION DOLLARS (insert Dr. Evil laugh here).  That would make this primary challenge one of the most successful attacks on corporate power in the United States ever conducted.

Even if the language is dropped, it seems as though that will only happen in exchange for increased tightness in the Volcker rule:

But those who believe the provision will be removed still think Democrats will find other ways to keep portions of it alive-possibly by tightening language in the Volcker rule in the bill, which places some restrictions on banks' proprietary trading.

"It is definitely going to be changed and in effect it is going to be dropped, but they will want to do it in a way that will preserve it as much as possible," said Joseph Engelhard, a senior vice president at Capital Alpha Partners LLC. "We are expecting Barney Frank to recommend changes to the Volcker rule language which would make the prohibition on proprietary trading more specific."


Even that will still cost banks a lot of profits--way more than $10 million.

Further, this entire effort to strengthen bank regulations could also end up saving the country a lot of money, in the form of avoiding, or significantly lessening the effects of, a future recession.

No, we didn't win in Arkansas last night.  That is an undeniable fact.  However, the $10 million could still prove to have a tremendous ROI, even apart from the real progressive power it built. If $10 million in arkansas ends up costing $100 billion in profits, and thus loosening their stranglehold over our democracy, then I say good deal.

Chris Bowers :: Arkansas Senate primary could cost Wall Street over $100 billion

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If that happens .. (0.00 / 0)
we will indeed have won .. but I'm taking a wait and see attitude .. the other thing is .. Lincoln has now opened herself up to attack from Boozman on all sorts of fronts .. if he takes advantage of them

A refreshing take on the primary (4.00 / 2)
It's good to see this post. Lincoln has to know that her Wall St. stance was one of her few assets in the eyes of the public. Let's hope for the best on this.

What makes you think this will stand? (4.00 / 2)
It did what it was supposed to do. Now it's time for her to vote against her own provision and rake in all the cash that comes from seeing the light, corporate style.

There was no silver lining to this primary, but your attempt to find one is appreciated.


I don't see how spinning off a division means "losing" money (0.00 / 0)
Someone is going to be happy to purchase Goldman's derivatives business, and that will be revenue to Goldman. In the short run, they'll make a bundle, and it will never be a pure loss.

Yeah, exactly (0.00 / 0)
We'll just have two companies replacing one: Goldman Sachs Financial Services and Goldman Sachs Derivative Operations. No net loss of profits.

Maybe the financial system will be more stable with two companies in the place of one; maybe not. I have no idea. Paul Krugman says it's not about the size of the companies, it is about whether regulations on the finance sector really have teeth. Krugman suggests that the banking sector should go back to being an honest, conservative, low-profit investment, like the 1940s-1970s.

So, Krugman's solution is the one that might actually cost Wall Street billions and billions, not splitting up Goldman. You wanna see some real wailing and gnashing of teeth? Get rid of the Chicago economists and Wall Street bankers running Obama's economics team.

The cancerous rot at the center is that these institutions have become so powerful and so skilled at manipulating the finance sector, that they add nothing to the productive economy, yet make billions and billions, and pay hundreds of millions to executives.

The distortion to our economy goes way beyond banking and finance.

Insurance companies aren't making an honest 5-10%, they're getting 20-30%... and it comes out of our health care. Electric utilities are no longer, conservative, safe, regulated monopolies, they have figured out how to play commodities markets (derivatives) to get 20-30%. See Jerome de Paris at the oil drum on Wind's latest problem: it . . . makes power too cheap":

Ironically, wind provides "utility-like" returns to investors, that is low, stable single-digit returns, as befits a regulated strategic infrastructure activity required for the common good. Utilities and investors should love the sector; but they have been spoiled by market deregulation, which has allowed companies to seek higher returns by under-investing, building merchant gas-fired plants, going for M&A games, and playing on market price volatility and trading - in other words, by behaving as perfect clients for investment banks...


[ Parent ]
you are dreaming (4.00 / 5)
This provision will never survive the conference committee.

Join the Iowa progressive community at Bleeding Heartland.

Right .. (4.00 / 1)
but then Boozman can hammer her on it .. so we put her between a rock and a hard place

[ Parent ]
Boozman's gonna hammer Lincoln for going easy on Wall Street? (0.00 / 0)
Or just for her inconsistency?

[ Parent ]
Man that smug comment by Robert Gibbs makes me look forward to that blessed day in 2012 (0.00 / 0)
when President Barack Obama gets his ASS KICKED back out on to the street whence he came.  Just before whatever GOP nuthead succeeds him takes me away to Guantánamo, I'll be laughing in glee at the end of "Change We Can Believe In!"

Diary of a Mad Housewife... (4.00 / 1)
Every time I say it can't get any worse, it finds a way.  

[ Parent ]
re: derivatives (0.00 / 0)
Goldman Sachs could lose up to 41 percent of its earnings if Congress approves tighter regulation of the derivatives market, according to an analysis by Bernstein Research.

goldman sachs losing 41% of its earnings? yeah right...


I have my differences with Chris (4.00 / 2)
But he is spot on here.  Win or lose, fighting tooth and nail (at the right times and for the right things) always pays dividends.  Politics is a contact sport and we just sent their team home with a lovely collection of black eyes and busted lips.

I compare it to schoolyard bullying.  When the bully is looking for easy meat, you have to fight them at least once and down to the wire.  Win or lose doesn't matter - that bully will move on and look for easier prey going forward.  If the bully fights you again and loses, they look really stupid and ineffective (so they won't chance it.)  In the Obama/labor fight, now when the big unions threaten to hurt your candidates (and your election in 2012), you can't assume an empty threat or afford the chance it is not.  

This was a loss at the polls but a big score in building momentum for progressives and labor IMHO.  Just wait until Leiberman gets his in 2012 - we'll see the benefit then.


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