Report: Rolling Back Dodd-Frank's Derivatives Rules Would Ignore History's Lessons

A new Public Citizen report details how deregulating the financial derivatives market contributed to the financial crash and warns lawmakers - who are considering deregulating the derivatives market again - about the consequences of doing so.

The report, "Forgotten Lessons of Deregulation: Rolling Back Dodd-Frank's Derivatives Rules Would Repeat a Mistake that Led to the Financial Crisis," explains how America's top financial policymakers deregulated the financial derivatives market in the 1990s and provides a detailed account of how deregulation led to the ensuing housing bubble, financial crisis and Great Recession.

It comes as members of Congress have introduced nine bills that would weaken the derivatives provisions of the Dodd-FrankWall Street Reform and Consumer Protection Act of 2010.

All seven bills moving in the U.S. House of Representatives have been approved by committees, and three have passed the full House. Two bills that would exempt overseas transactions from Dodd-Frank's derivatives provisions may be voted on as soon as Thursday in the House agriculture committee. Other bills would exempt trades by supposedly "small" players, reduce transparency requirements and strike down a provision to ban derivatives trading by federally insured banks. At least three other bills would impose impediments for agencies to promulgate rules concerning financial services in general. The bills are listed in the report's appendix.

"Rolling back Dodd-Frank's derivatives reforms would invite a new crisis even before we are done picking up the pieces from the disaster that prompted the reforms in the first place," said Bartlett Naylor, financial policy advocate with Public Citizen's Congress Watch division.

The push to provide regulation-free zones for derivatives is reminiscent of the 1990s, when many top policymakers argued that investors in derivatives markets were too sophisticated to need federal oversight. Those investors ended up using derivatives to take on risks so immense that they necessitated a massive, taxpayer-financed bailout to prevent a total collapse of the financial system. The crisis plunged the nation into a recession from which it has yet to recover.

As recounted in Public Citizen's report, many of the policymakers behind the deregulation of derivatives in the 1990s have admitted they were wrong. These include former President Bill Clinton, former Federal Reserve Chairman Alan Greenspan and, with more nuance, two former Treasury secretaries. For instance, former Treasury Secretary Robert Rubin co-signed a letter in 1998 expressing "grave concerns" about an overture by the Commodity Futures Trading Commission to consider strengthening derivatives regulation. Rubin now claims he favored more stringent regulation at the time but that the financial services industry's opposition was "insurmountable."

But today, the industry once again is using its force to push for lenient treatment of derivatives.

"Deregulation was the cause of the recession. Better regulation is a prescription for a sustainable recovery," said Taylor Lincoln, research director of Public Citizen's Congress Watch division and author of the report. "Allowing derivatives to be traded in secret and without safeguards would ignore the lessons that the past two decades have taught."