Let’s Pretend Dodd-Frank Works Elizabeth Warren’s phony outrage over a rewrite of swaps rules. The political left is outraged over a corner of Congress’s omnibus spending bill that rolls back …

[Clint Counts]

Let’s Pretend Dodd-Frank Works

Elizabeth Warren’s phony outrage over a rewrite of swaps rules. The political left is outraged over a corner of Congress’s omnibus spending bill that rolls back a corner of the 2010 Dodd-Frank law. The premise of this made-for-media furor is that Dodd-Frank must never be altered because it ended taxpayer bailouts of giant banks. If only.

The Dodd-Frank provision at issue requires each bank holding company to move roughly 5% of its derivatives contracts from its commercial bank insured by the Federal Deposit Insurance Corporation into a separate subsidiary that is not insured by the FDIC. Therefore all the derivatives exposures would still belong to the same bank holding company, and roughly 95% would stay in the FDIC-insured depository institution.

The vaunted 5% are instruments that the politicians have decided are particularly risky. And we are asked by Sen. Elizabeth Warren (D., Mass.) to believe that having banks move them to another subsidiary of the same company represents “important protections that keep our economy safe.”

Ms. Warren says that junking the rule will “let derivatives traders on Wall Street gamble with taxpayer money and get bailed out by the government when their risky bets threaten to blow up our financial system.” She’s urging Democrats to oppose the big budget bill, and as we write this she’s stampeded many House Democrats against it.

We’re all for shrinking the taxpayer safety net. And we hate to be the ones to break it to Ms. Warren, especially mid-passion play, but separate provisions of Dodd-Frank have already stretched the taxpayer safety net to cover Wall Street’s derivatives trading.

All of the major clearinghouses that stand behind derivatives trades have been deemed “financial market utilities” and under the law now have access to emergency loans from the Federal Reserve. All of the giant Wall Street banks at the center of the derivatives market have already been deemed “systemically important” under the law. And the FDIC, which now has the responsibility to rescue—er, “resolve”—failing banking giants, has already clarified that its goal is to keep the subsidiaries of giant bank holding companies operating even if the parent is failing.

During Ms. Warren’s Wednesday stemwinder, we got the feeling that even she understands this. We can’t say for certain whether she was ad-libbing or reading from a text, but she referred to the FDIC as “the agency that will be responsible for bailing out Wall Street when their risky bets go sour.” Exactly.

This proposed change is far from the top priority in fixing Dodd-Frank. Engineered by Sen. Chuck Schumer (D., N.Y.), the change will give big banks an edge over non-bank competitors that cannot use deposits to fund their derivatives trades. It ought to be revisited as part of a larger overhaul of the 2010 law. But no one should believe that the Dodd-Frank status quo prevents bailouts.

This week’s show of anger is intended to promote the same false narrative that liberal politicians have been telling since the 2008 panic. This fairy tale holds that the root cause was derivatives, and not the underlying mortgage crisis and too-easy monetary policy that Washington did so much to create.

Bankers without fear of failure can get in trouble in many ways (although usually it’s about real estate), and many have failed for reasons that had nothing to do with swap contracts. Hard as it may be for progressives to understand, derivatives serve an economic function beyond enriching bankers. Main Street companies and farmers use them every day to manage risks—locking in prices on products they buy and sell, reducing their exposure to changes in interest rates or the value of currencies in which they will be paid by overseas customers.

Such activity had nothing to do with the financial crisis, but the misguided war on derivatives resulted in another Dodd-Frank provision requiring Main Street customers to put up more cash when engaging in such contracts—cash that could otherwise build their businesses. This destructive piece of Dodd-Frank is also going away this week, thanks to Rep. Jeb Hensarling’s (R., Texas) bargaining over federal terrorism insurance.

For those who seek to prevent future taxpayer bailouts, the issue is not about the terms of a manufacturer’s swap contract or which bank subsidiary is allowed to hold which type of exposure. The issue is whether guardrails can be created to prevent central bankers, regulators and politicians from creating a credit mania and then rescuing the biggest losers when the boom turns to bust.

This is the critical reform project, and debunking the false assurances of Dodd-Frank is a good place to start.

[PHILIP SCHNEIDER]

Rather than reduce the exposure to derivatives we should be concentrating on the liberal progressive democrat machine exposure to corrupt practices, using the IRS to suppress conservative campaign finance, and figure out a way to inexpensively transport 34 million illegal aliens back across our southern border.