Today, the Senate began debate on financial regulatory reform, after Republicans finally agreed to end three days of obstruction last night and allow the bill to come to the floor. Ever since regulatory reform first began to move through the House of Representatives last year, the GOP (and its allies in the big business community) have sought out sympathetic figures that it (falsely) claims the legislation will have an adverse effect upon. Florists, churches, and the makers of Snickers bars have all had their moment, and today’s choice is community bankers.

First, Sen. Saxby Chambliss (R-GA) appeared on MSNBC to decry the effect of derivatives regulation on community banks. Then, Sen. Richard Shelby (R-AL), the ranking member of the Senate Banking Committee, went to the Senate floor to claim that resolution authority — the proposed mechanism for unwinding large, failed financial firms — would give large banks an advantage over their smaller counterparts. Watch a compilation:

Neither of these concerns has a basis in reality. Chambliss is worried about the effect of derivatives reform when 97 percent of the activity in the $300 trillion derivatives market is undertaken by just five mega-banks: JP Morgan Chase, Bank of America, Goldman Sachs, Citigroup and Wells Fargo. I’m not sure what sort of derivatives trading Chambliss thinks is occurring at the community level, but reform should make it cheaper for businesses to use derivatives to legitimately hedge against risk.

As for Shelby’s concern, the fact that resolution authority will enable the very biggest banks to fail (instead of being propped up by the government) should benefit smaller banks — which already have a mechanism in place for when they fail — by removing the big firms’ implicit government guarantee.

But if the GOP is really concerned about the effect of regulatory reform on community banks, then it should be embracing the push to levy a bank tax on the biggest financial firms. This would help level the playing field by making it more expensive to be a large interconnected firm (offsetting some of the funding advantages that such size conveys). The Congressional Budget Office has said that a bank tax would “improve the competitive position of small- and medium-size banks, probably leading to some increase in their share of the loan market.”

Of course, the GOP has shown no inclination to support a bank tax. In fact, it has actively scoffed at the idea. But Sen. Max Baucus (D-MT), chairman of the Senate Finance Committee, said earlier this week that “I don’t think there’s much doubt that there will be a bank tax.” So will Chambliss and Shelby jump on board?

This week, a slew of current and former Goldman Sachs executives appeared before the Senate Permanent Subcommittee on Investigations to attempt to explain the firm’s practice of selling products that it internally regarded as “shi*ty.” The timing of the hearing was fortuitous for Democrats, as they try to shepherd Sen. Chris Dodd’s (D-CT) financial regulatory reform bill to a vote.

One of the more contentious aspects of the reform debate is that dealing with derivatives, after Sen. Blanche Lincoln (D-AR) released a surprisingly strong bill that goes further in bringing the opaque markets into the light than either Dodd’s or the bill passed by the House of Representatives last fall. And Goldman Sachs, along with the rest of Wall Street, are mobilizing to blunt the impact of the bill.

The five largest banks in the nation made $23 billion on derivatives trading in 2009, so this is a very lucrative business that they are trying to protect. But as former President Bill Clinton pointed out at the Peter G. Peterson Foundation yesterday, the problem with Goldman’s business model is that its transactions have nothing to do with an actual product or the legitimate use of derivatives to hedge against risk:

I like this idea of requiring greater reserves on derivatives and I think there ought to be clearinghouses as [CFTC Chairman] Gary Gensler suggested, because I think that too much of this stuff has no economic purpose no matter who wins and who loses. And to me that’s the bigger problem. These Goldman guys are mad because they think they were targeted at this time, and they think they didn’t violate the law. I’m not at all sure they violated the law. But I do believe that there was no underlying merit to the transaction, and that’s what I think we need to look at.

Watch it:

Clinton isn’t kidding. As I’ve pointed out quite a bit, there are $78 dollars in derivatives for every single dollar that is used by a company to hedge against risk. This is the kind of stuff Great Britain’s chief regulator, Adair Turner, is talking about when he says that “there are some profitable activities so unlikely to have a social benefit, direct or indirect, that [banks] should voluntarily walk away from them.” As Clinton suggested, banks should certainly have to put these trades through clearinghouses, which ensure that both sides of a trade have adequate collateral to back the deal up. Even better is putting the trades on a public exchange, so that other investors and regulators can get a much better sense of what is occurring in the market.

Yesterday, after three days of preventing Sen. Chris Dodd’s (D-CT) financial regulatory reform bill from coming to the Senate floor, Republicans finally relented. Debate on the bill is slated to start this afternoon, and first up on the docket is the section dealing with derivatives, which has Wall Street up in arms.

The Republicans are hoping to weaken the derivatives section of the bill by portraying it as harming businesses that aren’t connected to Wall Street. Senate Minority Leader Mitch McConnell (R-KY) displayed a bit of this earlier in the week, when he said that reform of the derivatives market would impair Mars’ ability to hedge against changes in sugar prices (which is obviously integral for a candy company). Sen. Kit Bond (R-MO) grabbed this ball last night and ran with it, claiming on CNBC that Dodd’s bill would “stick it” to farmers who use derivatives to protect themselves against price changes:

What I’m worried about is Main Street, and the derivative section as written now would stick it to energy companies, utility companies having to hedge, as well as farmers. We’ve got to get that part out of it. That’s the bad part…What I want is spinning off Main Street, get them out of the derivatives. It was not derivatives on Main Street that caused this problem. Get Main Street out. That’s what we want. We want out of it. Fix Wall Street, don’t kill Main Street.

Watch it:

Sen. Richard Shelby expressed a similar concern, saying “I want to make sure that the bona fide end user is protected — the people who are not casino gamblers with derivatives that did not cause the problem, that hedge and manage risk for their own well-being.”

These concerns are vastly overblown, as the legislation already contains exemptions for those entities legitimately hedging against risk. But furthermore, the commodities futures market (which deals with products like corn and wheat) is already regulated in much the way that Dodd’s bill would regulate the rest of the derivatives market, using clearinghouses to ensure that both parties involved in a trade have adequate collateral to back up their deal. And as Commodity Futures Trading Commission Chairman Gary Gensler explained, the commodities market has survived decades of financial turmoil largely without incident precisely because it’s regulated:

Derivatives themselves are not new: They have existed since the Civil War, when farmers and grain merchants began using them to hedge against future changes in the price of corn and wheat. So they entered into derivatives contracts with other parties to lock in the price of corn or wheat for harvest time. These first derivatives — called futures — have been comprehensively regulated since the 1930s. Futures markets functioned largely without incident during the 2008 financial crisis in part because these contracts are cleared by regulated clearinghouses.

It’s the rest of the $300 trillion derivatives market that is the concern, and which the Democrats want to regulate in much the same way that futures contracts are already overseen. For every $1 used by a company or a farmer to legitimately hedge against risk, there are $78 in derivatives that are traded for the sake of being traded. As former President Bill Clinton put it, “I think too much of this stuff has no economic purpose…Too much of our growth in the last decade was in finance.” And prudent regulation is needed to make sure that this huge market can’t bring the economy to its knees again.