Start the conversation
It just so happens I have both a "trick" and a "treat" for you today.
First, the "trick."
Wednesday the House passed a bill titled The Swaps Regulatory Improvement Act.
The trick is, it's not about improving the who-really-knows-how-many trillions of dollars swaps (derivatives) market.
Instead, the bill aims to reduce restrictions under section 716 of the Dodd-Frank Act. Section 716 requires banks to spin off risky swaps out of depository institutions to subsidiaries and affiliates.
Here's what Rep. Jeb Hensarling (R-TX), chairman of the House Financial Services Committee, said on the House floor Wednesday: "Section 716 requires financial institutions to 'push out' almost all of their derivatives business into separate entities, this not only increases transaction costs, which are ultimately paid by the consumers, it also makes our financial system less secure by forcing swap trading out of regulated institutions."
WHAT? Now that's tricky!
Transaction costs? Those are borne by the traders at the banks and hedge funds that trade those financial weapons of mass destruction, not "CONSUMERS." Consumers don't trade this stuff; these are not consumer products. Consumers will only pay for these weapons of mass destruction if the banks that taxpayers – the consumers of the crap banks spew out when they fail – have to bail out the banks that trade this stuff!
But it passed.
The House measure passed by a bipartisan vote of 292-122, including 70 Democrats.
The trick was neatly exposed by Rep. Maxine Waters (D-CA), the top Democrat on the banking panel. She fumed, "This legislation will effectively allow banks to undertake derivatives trading with depositors' money. If the banks lose money on this sophisticated trading, systemic risk could creep back into our financial system, once again putting the economy – and the American taxpayers – at risk."
Now that's scary.
Next, this could be a big treat for you and me… depending on how it eventually plays out…
It's about JPMorgan Chase's record $13 billion settlement, the one that's supposed to consolidate a lot of government actions against the "too big to fail" (TBTF) bank… the settlement that's now looking like it won't happen.
Here's what the hang-up is…
JPM is being sued by Deutsche Bank National Trust Co. on behalf of securitization trusts seeking as much as $10 billion in damages. The case that began in 2009 alleges that JPM is responsible for crappy MBS (mortgage-backed securities) they originated, packaged, and sold to the trusts that are represented by DBNT.
JPMorgan is saying, "That wasn't us! That crap was stuff that Washington Mutual was responsible for. We only bought WaMu because we are good Americans and their failure back when the crisis was beginning would have hurt a lot of little peeps, so get off our backs." That's just their preamble. They continue their defense by saying, "Your beef isn't with us, your beef is with the FDIC. They are responsible for WaMu's legacy liabilities."
Ten billion dollars is a lot of money.
The FDIC is saying, "Go shove off, you losers. You bought the failed bank, the largest bank to ever fail in the U.S., with its $307 billion in assets and all those branches in California and the West for $1.9 billion to get access to all their branches and customers, where you didn't have a presence. Altruism? Shove it."
JPM is saying back to the FDIC, "No, you shove it!"
So what's really going on?
John Douglas, counsel at the law firm of Davis Polk & Wardwell and a former FDIC general counsel, said in an American Banker article Thursday, "This dispute has its origins in the purchase and assumption agreement between JPM Chase and the FDIC [that was] signed in 2008, where the FDIC takes the position that JPM assumed all liabilities of WaMu, and JPM asserts it has no liability for the pre-failure errors of WaMu related to these mortgage loans."
That's the back story. Now fast forward to the $13 billion settlement.
Of the $13 billion, $5.1 billion goes to settle claims by the Federal Housing Finance Agency over mortgages securities bought by Fannie Mae and Freddie Mac. The big settlement appears to protect the FDIC in its "corporate capacity" from future JPMorgan indemnification claims. But it could leave unresolved future claims on the WaMu receivership managed by the FDIC.
In other words, if JPM settles in the big picture deal and pays the claims related to WaMu that it's saying should be paid by the FDIC, the lawyers for Deutsche Bank will argue that JPM and not the FDIC has to pay them.
The "treat" for me – and a lot of you and other peeps who aren't big JPM fans – would be if they actually settle for the $13 billion and in doing so expose themselves in the Deutsche case and remove the FDIC from harm's way. That would be a treat, not because the bank might have to pay billions more (though that's okay with me on account of the fact it further exposes them and other banks to similar lawsuits for the pain they inflicted across the globe), but because it relieves the FDIC of having to potentially pay.
Because who backs the FDIC if they run out of money? The taxpayers.
More from Shah: The First Thing Yellen Should Do to Save America
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.