By Pam Martens: December 22, 2014

Last week members of both the House and Senate were issuing press releases to express their outrage over the sneaky repeal of a Dodd-Frank financial reform provision meant to stop giant Wall Street banks from using FDIC-insured bank affiliates to make wild gambles in derivatives, thus putting the U.S. economy in grave danger again and the taxpayer at risk for another behemoth bailout.

What was the Federal regulator of these very same banks doing? It was bragging in a press release issued at the end of the same  week about the gargantuan risks these  insured banks were taking in derivatives.

The press release was issued on Friday, December 19, 2014 by the Office of the Comptroller of the Currency (OCC), the regulator of all national banks which is mandated to make sure that insured banks “operate in a safe and sound manner.”

The press release begins with a bizarre sounding headline for a bank regulator: “OCC Reports Third Quarter Trading Revenue of $5.7 Billion.” It wasn’t actually the OCC that had this trading revenue, of course, it was that “Insured U.S. commercial banks and savings institutions reported trading revenue of $5.7 billion in the third quarter of 2014” and year-to-date trading revenue of $18.3 billion, as the press release explains.

In a sane financial world, of course, insured banks are not supposed to be trading; they are supposed to be receiving insured deposits backstopped by the U.S. taxpayer in return for making loans to worthy businesses and consumers in order to create jobs and grow our economy.

But Alice in Wonderland regulators have now completely bought in to the lunacy of today’s Wall Street bank structure, as this press release leaves no doubt. This next paragraph sounds more like a gushing letter to clients from a hedge fund than a press release from a Federal bank regulator:

“ ‘There were fairly low expectations for trading revenue at the beginning of the quarter, but client demand picked up fairly sharply toward the end, helping to make trading performance fairly positive,’ said Kurt Wilhelm, Director of the Financial Markets Group. ‘Trading revenue tends to weaken as the year goes on, so it wasn’t much of a surprise that it fell from the second quarter. But, stronger client demand, especially in foreign exchange (FX) products, helped to make it a much stronger quarter than last year’s third quarter.’ ”

We learn further that “Credit exposures from derivatives increased during the third quarter” and were driven by a 90 percent increase in receivables from foreign currency exchange contracts which now total $623 billion.

A 90 percent increase in any speculative trading should raise alarm bells but when foreign currencies like the ruble, yen and euro are experiencing wild volatility and Wall Street banks are under investigation for rigging foreign exchange markets, the concern should be even more pronounced, not cause for a celebratory press release.

Equally alarming is the news that “the notional amount of derivatives held by insured U.S. commercial banks increased $2.6 trillion” to a total of $239 trillion, of which 93 percent is concentrated at the four largest banks. The report itself breaks this out in more detail: Citigroup, the poster child for bank bailouts, now holds more derivatives than any other bank, $70 trillion, in its insured unit, Citibank. JPMorgan Chase, the bank that lost $6.2 billion just two years ago gambling in its insured bank with exotic derivatives, now holds $65 trillion in derivatives. Next in line is Goldman Sachs Bank USA with $48.6 trillion in derivatives and just $111.7 billion in assets in the insured bank unit. Coming in fourth is Bank of America with $37.5 trillion.

The irrational exuberance of this press release reminded us of its stark contrast to the opening lines of the Glass-Steagall Act, the legislation Congress put in place following the 1929 Wall Street crash – an epic collapse of speculation very much on a par with the crash of 2008. The Glass-Steagall Act, also known as the Banking Act of 1933, opens with these words:

“…to provide for the safer and more effective use of the assets of banks, to regulate interbank control, to prevent the undue diversion of funds into speculative operations, and for other purposes.”

The legislation created insured bank deposits to stop the run on banks while giving the Wall Street banks just one year to split apart: banks holding insured deposits could no longer put the country at risk with wild speculations in trading and underwriting of securities. Those operations, investment banking and brokerage, had to be spun off. The Glass-Steagall Act was repealed at the behest of Wall Street and its army of lobbyists in 1999; the financial system crashed a mere nine years later.

The response by Congress to the 2008 crash was to allow Wall Street banks to grow dramatically in asset size, derivative holdings and systemic risk. Even after the Senate’s Permanent Subcommittee on Investigations released a 299-page report last year, clearly demonstrating that Wall Street had learned nothing from its wild trading gambles that collapsed the financial system in 2008, Congress has taken no concrete action to rein in the risk.

The Senate’s 299-page report released on March 15, 2014 concluded a nine-month investigation into how JPMorgan Chase, the country’s largest bank, had misled the public and its regulators while hiding vast losses on exotic derivatives in its insured banking unit. The episode became known as the London Whale scandal since the trading occurred in London and the size of the trades was mammoth. Senator Carl Levin, Chair of the Subcommittee, released the following statement at the time:

“Our findings open a window into the hidden world of high stakes derivatives trading by big banks.  It exposes a derivatives trading culture at JPMorgan that piled on risk, hid losses, disregarded risk limits, manipulated risk models, dodged oversight, and misinformed the public. Our investigation brought home one overarching fact:  the U.S. financial system may have significant vulnerabilities attributable to major bank involvement with high risk derivatives trading…

“The whale trades demonstrate how credit derivatives, when purchased in massive quantities with complex components, can become a runaway train barreling through every risk limit.  The whale trades also demonstrate how derivative valuation practices are easily manipulated to hide losses, and how risk controls are easily manipulated to circumvent limits, enabling traders to load up on risk in their quest for profits…And given how much major U.S. bank profits remain bound up with the value of their derivatives, derivative valuations that can’t be trusted are a serious threat to our economic stability.”

Until the Glass-Steagall Act is reinstated, our country, our economy and the U.S. financial system remain in peril.