A few days ago, something really crazy happened in the House of Representatives, and you probably haven’t heard a word about it. To understand the depths of this crazy, however, we have to take a painful but thankfully brief look into our recent history. More specifically, we have to go back to the 2008 financial crisis and look at the giant insurance group that made its claim to fame during that time: AIG. Remember AIG? It was that one company that nearly collapsed and eventually had to be bailed out by taxpayers to the tune of $85 billion. Well, the risky behavior that caused AIG so many problems was something called “derivatives trading.” Explaining the ins and outs of derivatives trading could be its own class, but I’ll try to offer a brief summary of the concept. Derivatives trading is essentially the act of creating a contract based on some underlying object of trade. If that seems a bit too much like baseless jargon to you, maybe an example will help.
Imagine that you have a huge family coming over for Thanksgiving, and you need a lot of turkeys to feed them all. Let’s say you need 25 turkeys in total. While you could simply go to the supermarket and try to buy all those turkeys, you decide instead to try to find another place to get some turkeys in case the supermarket doesn’t have 25 turkeys when you go to buy them. You go to a turkey farmer and ask her if there’s any way she can guarantee you 25 turkeys for Thanksgiving. She says that she can’t simply guarantee that she’ll have that many turkeys right before Thanksgiving, but she offers a solution. She proposes that you give her money for 25 turkeys now, and she’ll deliver them all three days before Thanksgiving. You think that this is a good idea, but aren’t sure how much money to give per turkey, as turkeys can sometimes be as cheap as $10 but other times as expensive as $30. You decide to split the difference and give $20 for each turkey — $500 in total. So, you give the turkey farmer $500, and she gives you a note (an IOU, if you like) saying that she will give you 25 turkeys any time before Thanksgiving. Basically, you’ve made a contract with the turkey farmer, and this contract is derived from something underlying — the turkeys. This is the essence of derivative trading. Actually, this is an example of a future derivative, in which you make a trade based on an underlying future asset. There are also option derivatives, in which you make a contract for the option to buy (following our example, you pay another turkey farmer for the option to make the same contract as you already have with the old turkey farmer, just in case her farm fails) and swap derivatives, which, more or less, equate to trading a security with an uncertain interest rate for one with a fixed interest rate, or vice versa. In any case, all types of derivatives trading involve the creation of a contract based on an underlying something, and as useful as that may be, it’s pretty obvious that putting a lot of funds into derivatives trading can be very dangerous.
Getting back on topic, AIG got in big trouble when it got too deeply involved in derivatives trading and had to be bailed out so that it wouldn’t fail and destroy the national economy. Of course, neither the Occupy Wall Street protesters nor the Tea Party conservatives were very thrilled about the concept of having government money spent on bailing out a giant corporation. That rare, beautiful moment of shared anger was enough to cause Congress to pass the Dodd-Frank Wall Street Reform and Consumer Protection Act, which included a provision stating that companies cannot receive bailouts for certain kinds of derivative trading. This brings us back to the craziness mentioned in the beginning of the article, because the House of Representatives passed legislation that would get rid of the aforesaid provision of Dodd-Frank, letting corporations know that the government could, and probably would, bail them out if they were ever to gamble themselves into a corner.
Note, by the way, that this didn’t happen because of popular outcry. Most people don’t even know that derivative trading exists, let alone hold any desire for its deregulation. This happened because banks wrote this bill. I’m not being metaphorical here; banks literally wrote parts of this bill. Seventy out of 85 lines in the bill are based on recommendations from model legislation made by Citigroup, another corporation that played a huge role in the financial crisis and required billions of taxpayer dollars to stay afloat. Two key paragraphs in the House’s bill (lovingly dubbed “H.R. 992”) are practically copy-pasted from Citigroup’s bill. Note, by the way, that members of the House are given over $22.4 million in campaign contributions from interest groups who support H.R. 992 — 5.8 times more than what they receive from interest groups opposed to the bill. Also, campaign donors with Wall Street ties are major sources of campaign funds for the bill’s sponsor and for six out of eight of its co-sponsors. Call me crazy, but it looks like the primary motivation for passing this bill might not be the interests of the average American constituent.
Now, don’t think that this is just Republicans or just Democrats backing up this bill. This is a bipartisan bill, sponsored by five Republicans and four Democrats. Think about that for a second. In a country in which 20 percent of children are born into poverty, our legislators are hard at work passing a bill that removes the protection put in place after the last financial crisis and that was written by lobbyists working for the people who caused that financial crisis. They can’t agree on health care, war spending, education, food stamps, or anything else of benefit to the people of America, but they can work hand-in-hand to protect their precious campaign funds. This buyout of our political system by a tiny group of lobbyists reveals the true nature of our government. We live under a system filled with corruption. Our government is one that would repeal laws meant to prevent another recession for campaign money and deny compromise on important social and economic issues for extra votes on Election Day. Out of all the problems we as a people need to fix, this is the first.
Talha Mukhtar is a freshman legal studies major at Drexel University. He can be contacted at [email protected].