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Banks, financial rules, Obama, Lincoln, derivatives

Eyes glaze over when financial wizards start talking about derivatives and the value (or danger) they bring to the economy, but our Readers Who Comment have waded into the subject with vigor as they debate how much change Congress should impose on the banking system to try and prevent another occurrence of the recent unpleasantness.

The question is whether banks should be in the derivatives business -- where they have made a lot of money but where some of them also got in big trouble -- instead of simply accepting deposits and doling out loans. Some readers think a total separation is exactly right, others argue the opposite. Sen. Blanche Lincoln (D-Ark.) has proposed a separation as both Democrats and Republicans work to show that they have the best interests of real people in mind.

As David Cho, Brady Dennis and Scott Wilson write, President Obama "said he was confident that a bipartisan bill could be worked out to ensure that the economy is protected from the collapse of large financial companies."

We'll start with shadowmagician, who wrote, "Good! About time! If investors want to gamble, they can go to Vegas or Atlantic City. If they lose, that's their tough luck - there's no reason for the taxpayer to be involved"

And Jihm said, "All derivatives should be illegal - period."

But James10 replied, "Not going to happen. Farmers use futures contracts to hedge their production. Airlines, most notably Southwest will buy futures to lock in prices of fuel. You would be wiping out the entire options market. Warrants and exchange traded funds would get tossed out as well as Convertible bonds."

robinhood2 wrote, "Not certain what the answer is or even if there is an answer.. But it appears that Obamba has an opportunity to take the high ground and work with the Republicans...But the Dems in congress see the other party as their mortal enemy and on something like banking reform makes no sense...Can hardly wait until November..."

postfan1 said, "I love the Lincoln idea. It doesn't take a genius to know that you keep gamblers (investment banks) away from the household expenses account (banks holding the currency). It makes a lot more sense to allow investors to gamble with their own money. Too bad more people in congress don't have a backbone..."

TheSmartSet wrote, "I'm not going to feel comfortable about our recovering economy until there is strong regulation on the derivatives market. Since no one except a few fellows on Wall Street know what the heck deriviatives are, it makes a lot of sense to bring them out of the closet for everyone to see. Call your Senators and stress to them to bring strong reform to these shady markets. Better yet, make a call into the Senate Committee on Agriculture and let them know we need to tighten regulation and enlighten us."

JovialReaper said,"Everyone knows that profit trumps everything on Wall Street. If this proposal passes into law, New York better secure netting around every building in the financial district to catch all the leapers. Better yet, make the financiers wear wind-activated sirens on their ankles to warn pedestrians of their approach."

newagent99 wrote, "Jud Gregg says the derivatives market will move to singapore .. Can we send the Bankers and their families too?"

juggernautenterprises said, "YES, banks should be banks and investment brokers, investment brokers. To each their own separate worlds."

Jihm wrote, "Derivatives should be illegal. Getting them out of banks is a small step in the right direction. But, relegating derivatives to only certain institutions will not solve the whole problem. It is much like relegating murder to only certain criminal gangs."

pgr88 said, "The obvious answer? Let them go bankrupt if they screw-up and stop issueing Gov't agency gaurantees. Give them free Taxpayer money to play with and they will be risky, regardless of any new regulations"

richardwhetstone wrote, "Senator Lincoln's proposals with respect to derivatives is what is needed to prevent another financial crisis which the world has just experienced. If financial institutions want to engage in these types of trades then they should assume all of the risks. The credit worthiness and capital underlying them should not be dependent on the United States Government. These trades in derivatives should be segregated from banking. It would be prudent to reinstate Glass-Stegall to make the separation from banking and investment banking permanent..."

But B2O2 said, "I'm a liberal who feels that Wall Street needs to be better regulated, but this would be a mistake. Derivatives need to be transparently described, and their valuation made possible through reasonably followed analysis (not buried in multiple-level-deep obfuscation of the origins of their assets). But they have their place. Done right, they actually keep unhealthy (and unstable) bubbles from forming in certain markets..."

robertjames1 wrote, "Senator Lincoln's proposal is a sound proposal. I like the idea that banks should be restricted to banking and that other corporations (viz investment banks) should be permitted to engage in riskier ventures such as the trading of derrivatives... If banks are restricted to borrowing funds from depositors and lending those funds to corporations and home buyers etc then the system's safety will improve enormously."

wagner3792 wrote, "I'm no financial expert, and I fully acknowledge that I don't completely understand the pros and cons of Lincoln's proposal. What I do know for sure, however, is that if the big investment banks (and their water carriers in the GOP) hates something, it's probably a good idea for the rest of us..."

But chaemoondriver warned, "Health care already destroyed,next is financial which is the heart of the country's industry. With it gone, this country will never comeback and our dear Democratic government will push this country over the cliff and put the finishing touch... We have lost sight of recognizing who are the true enemy of this state."

We'll close with mischanova, who wrote, "Can't wait for the next local Tea Bag party to see the signs that read 'Stop the Wall Street Bail-outs. This sign brought to you by Bank of America.' "

All comments on this article are here.

By Doug Feaver  |  April 15, 2010; 9:09 AM ET
 | Tags: Banks, Lincoln, Obama, derivatives, financial rules  
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Next: Wall Street reform and Goldman Sachs


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