Banks that created the crisis may profit from the cleanup Banks may profit from their mess

Treasury Secretary Timothy Geithner probably doesn’t have a lot of time to watch YouTube videos, but there’s one he should take a few minutes to review.

It’s from a Feb. 11 hearing of the House Banking Committee in which Rep. Mike Capuano, D-Mass., asked eight top executives for the country’s largest banks how many of them engaged in trading credit default swaps and other derivatives. All raised their hands.

“Basically, all or most of you engaged in all or at least some of the activities that actually created this crisis,” Capuano responded.

Had Geithner seen Capuano’s rant, a blistering tirade that gave voice to America’s exasperation with Wall Street, he might have thought twice about allowing the banks to essentially dominate the proposed market for trading derivatives.

Geithner recently unveiled new regulations for the derivatives market, which a year ago was worth about $684 trillion. It requires that the arcane financial instruments trade through a central clearinghouse and that the dealers be subject to increased capital and reporting requirements.

That doesn’t sound so bad, but the new rules would make it difficult to trade derivatives unless you’re a bank. That may make some sense for financial derivatives like credit-default swaps, but it creates a problem for the fringes of the derivatives markets, such as energy trading, where companies aren’t structured like banks.

Commodities derivatives are a tiny slice — about 2 percent — of the overall derivatives market, but they have a big effect on companies and consumers.

Oil and derivatives

Independent oil producers, for example, may not have the balance sheet they’d need under the rules to trade derivatives, which many use to hedge against swings in commodity prices.

I spoke with several energy traders last week, and though they didn’t want me to quote them, they were worried that the language in the new rules would give banks a lock on the market. The Treasury didn’t seek their input in creating the new rules, they said.

Metals traders have expressed similar concern. It’s also unclear how the new rules would affect trades of carbon offsets required under the proposed cap-and-trade bill I wrote about Friday.

Metals traders have expressed similar concern. It’s also unclear how the new rules would affect trades of carbon offsets required under the proposed cap-and-trade bill I wrote about Friday.

Most of us don’t really understand how derivatives work, and it may not seem terribly important how they’re traded. But derivatives affect the prices we pay for things like airline tickets, food and electricity. Companies use them to hedge against the unexpected. Ski resorts, for example, use derivatives to protect against light snowfall.

A spokeswoman for Southwest Airlines, the most effective air carrier at using derivatives to keep fuel costs down, said the company is monitoring the rule proposal but hasn’t taken a position.

The Enron factor

There is, of course, an uncomfortable flashback in arguing that traders shouldn’t be shut out. One of the biggest non-bank sellers of derivatives a decade ago was Enron.

But it’s possible to increase the scrutiny of the over-the-counter derivatives market without limiting who can participate. Clearinghouses, for example, should make pricing more transparent.

Instead, we seem to be allowing those most responsible for our current crisis to rewrite the rules and enrich themselves yet again at the expense of everyone else, to profit from the mess they helped create.

“It’s all the same people doing this,” Capuano said during the February hearing.

In the end, it comes down to a show of hands. First bankers got their hands stuck in the financial cookie jar, then they got a handout from the government, and now they’re making a grab for the derivatives market.

At every turn, Wall Street wins, hands down.

Loren Steffy is the Chronicle’s business columnist. His commentary appears Sundays, Wednesdays and Fridays. Contact him at loren.steffy@chron.com. His blog is at http://blogs.chron.com/lorensteffy/.