Today, the House Financial Services Committee began marking up regulatory reform legislation, and the first topic of debate was regulation of derivatives, the trading instruments made infamous by, among others, American International Group (AIG) and Lehman Brothers.

As proposed by Committee Chairman Barney Frank (D-MA), the legislation would require that derivatives dealers and companies heavily involved in speculative derivatives trading to list their activity on electronic exchanges, to provide some transparency to the opaque derivatives market. The legislation would also require companies to have more capital on-hand to protect against derivatives losses.

As Frank said, the lesson of recent years has “been that the systemic risk of not having this or a lot of this on exchanges is a negative.” Frank’s approach also matches up with that taken by the House Agricultural Committee, which shares jurisdiction over derivatives with Financial Services.

However, during the markup Republicans made it abundantly clear that they oppose the legislation, claiming that it will be a “job killer,” which will ultimately cause a “decrease in the American dream.” Watch a compilation:

Back when the Republicans first released their vision from regulatory reform, I wondered how seriously they would take regulation of derivatives. And here we have the answer: not very.

The concern that Republicans ostensibly have is that companies who legitimately use derivatives (so-called end-users) to hedge risks would find their access to derivatives restricted by a transparent market. Not only is that a silly argument — as transparency should help the legitimate users of derivatives to have better price information — but the legislation exempts companies “that use derivatives for commercial reasons to protect against risk” from participating in the exchanges. Companies would only lose that exemption “if regulators see a pattern of activity that places other participants in the transactions at risk.”

Let’s remember this chart, which shows that the vast majority of derivatives are used by traders — not by corporate end-users:

So by trying to scale back regulation, the GOP (wittingly or not) is doing the work of the Wall Street banks that use derivatives as a money-making end in themselves, not as a means to protect themselves. The committee plans to vote on the derivatives overhaul tomorrow.

A lot of the discussion regarding the health of the economy has centered on the unemployment rate of 9.8 percent. But the economic crisis is not only affecting those who have lost their job. As the New York Times reported today, “pay cuts, sometimes the result of downgrades in rank or shortened workweeks, are occurring more frequently than at any time since the Great Depression”:

The Bureau of Labor Statistics does not track pay cuts, but it suggests they are reflected in the steep decline of another statistic: total weekly pay for production workers…representing 80 percent of the work force. That index has fallen for nine consecutive months, an unprecedented string over the 44 years the bureau has calculated weekly pay, capturing the large number of people out of work, those working fewer hours and those whose wages have been cut. The old record was a two-month decline, during the 1981-1982 recession.

However, things are looking up on Wall Street, where “major U.S. banks and securities firms are on pace to pay their employees about $140 billion this year — a record high”:

Workers at 23 top investment banks, hedge funds, asset managers and stock and commodities exchanges can expect to earn even more than they did the peak year of 2007, according to an analysis of securities filings for the first half of 2009 and revenue estimates through year-end by The Wall Street Journal. Total compensation and benefits at the publicly traded firms analyzed by the Journal are on track to increase 20% from last year’s $117 billion — and to top 2007′s $130 billion payout. This year, employees at the companies will earn an estimated $143,400 on average, up almost $2,000 from 2007 levels.

So it seems as if the worry that Wall Street compensation would climb back to 2007 levels were misguided — pay is, in fact, set to eclipse the 2007 highs. Financial firms told the Journal that “they need competitive pay packages, pointing to threats from non-U.S. companies, private-equity firms and hedge funds.” A Goldman Sachs spokesman said that “the easiest way to destroy the firm would be if we didn’t pay our people….Destroying a profitable enterprise would not be in anybody’s interest.”

Of course, I don’t know that it’s in anybody’s interest — save for the bankers themselves — to have a return to pre-crisis pay. But most insulting about this resurgence in pay is that Wall Street’s return to profitability has been driven, at least in part, by “the continuing effects of various government aid programs.” And while the administration’s “pay czar” has the ability to regulate pay packages at the seven companies still receiving extraordinary pay, there is nothing in place to rein in the rest of Wall Street, even as benign a measure as “say-on-pay,” which would mandate that shareholders hold a non-binding vote their companies pay packages.

Simply put, this is another example of the government’s extraordinary efforts to rescue Wall Street putting recovery there on a much faster timetable than everywhere else — and without the regulatory reform designed to remedy Wall Street’s ills being in place.