As the conference committee reconciling the House and Senate’s respective financial regulatory reform bills gets down to business this week, it will be starting with the Senate’s text as the base. When it comes to crafting a regulatory regime for derivatives — the risky instruments that played a large role in the economic crisis, and particularly in the downfall of AIG — this is a good thing, as the Senate bill is much stronger.

Strong derivatives reform will place as much derivatives trading as possible onto public exchanges (like that used for stocks) and force all customized trades that can’t go onto an exchange through a clearinghouse (which ensures that both sides of the trade have adequate collateral). The trouble with the House bill is that it contains a whole host of exemptions to the exchange and clearing requirements, which could allow financial companies that are only using derivatives to speculate to slip through, unregulated.

The financial services industry would, of course, like as many loopholes as possible to exploit down the road, and thus is trying to widen the exemptions. And House Republicans have been all too willing to play along, as evidenced by Rep. Spencer Bachus’ (R-AL) performance yesterday on C-Span’s Newsmakers.

Bachus made sure to pay lip service to the fact that “there needs to be disclosure, there needs to be transparency” when it comes to derivatives, but he then expressed shock that Democrats want to put trading onto exchanges, claiming that doing so “fixed things that weren’t a problem.” Watch it:

Of course, the way in which you bring transparency to the derivatives market is by, you guessed it, moving trading onto exchanges. Exchange trading ensures that both buyers and sellers know what the going rate for a particular product is, and leaves an easy trail for regulators to follow if there is fraud or abuse. Bachus, meanwhile, seems to want to implement transparency by waving a magic wand.

Bachus is using the same tactic that the right-wing has employed throughout the debate over derivatives, singling out end-users (non-financial corporations that legitimately use derivatives to hedge risk) as the poster-children for increased regulation. But remember, 97 percent of derivatives are held by just five mega-banks and there are $78 dollars in derivatives for every single dollar that is used by a company to hedge against risk.

A transparent, functional marketplace that fully utilizes exchange trading will actually bring prices down for the very companies that Bachus is expressing such concern for. And as Commodity Futures Trading Commission Chairman Gary Gensler explained, “exemptions will only come back to haunt us in the future”:

Every exemption for financial companies creates a link in the chain between a dealer’s failure and a taxpayer bailout. Every slice of the financial system that we cut out through an exemption could allow one bank’s failure to spread like fire throughout the economy. It is essential that financial reform does not allow loopholes that leave interconnectedness in the system.

If Bachus has a better idea, I’d love to hear it, but you can’t just snap your fingers and turn an opaque, non-functional market into a transparent one.

When the economic recovery act (i.e. the stimulus) was initially passed, Gov. Rick Perry (R-TX) earned a lot of headlines and the adoration of conservatives for loudly proclaiming that he would reject a portion of the funding meant to help states extend unemployment benefits. Though Perry was eventually forced by the Texas state legislature to accept the funding, he continued to rail against it.

Perry’s blustering belied the fact that Texas was only able to balance its budget because of the recovery act. And now that Congress is contemplating a tax extenders package that includes $24 billion to aid states with their Medicaid costs, Perry is up to his old tricks:

Texas Gov. Rick Perry (R), who was one of six governors who considered turning down stimulus dollars last year, may also reject the new round of funds. Perry’s office said Washington’s push for more spending was exacerbating healthcare problems. “This temporary [Medicaid] proposal, like their new health care bill, spends money they don’t have,” Perry spokeswoman Lucy Nashed said.

Perry’s stance has put him at odds with other Republican governors, including Gov. Arnold Schwarzenegger (CA). “I understand the need to pay for and restrain federal spending,” wrote Schwarzenegger in a letter. “But cutting the only funding designed to help states maintain the very safety-net programs Congress mandates us to preserve will have devastating consequences.” A spokesman for Gov. Jim Douglas (R-VT) added that “many states built this expectation of funds in their budgets, and without it, [there would be] either tax increases or the cuts to state government programs that would be pretty devastating.”

President Obama, in a letter to lawmakers over the weekend, pushed for Congress to provide more aid to states, and indeed, if states don’t receive help, they are going to be a substantial drag on the economy for the next couple of years. According to Mark Zandi, Chief Economist at Moody’s Economy.com, “state and local cutbacks may trim growth by about a quarter percentage point in 2010 and 2011 after shaving it by 0.02 point in 2010.” “The budget cutting that is dead ahead will be a significant impediment to economic growth later this year into 2011,” he said. An early sign of this potential drag was state and local governments cutting 22,000 jobs last month.

Plus, as Igor Volsky has pointed out, “eliminating additional health care spending may save money in the short term, but could very well increase health care costs by 2014, if the government has to subsidize coverage for a larger (and possibly sicker) uninsured population.” But Perry would rather continue his anti-federal government schtick, while simultaneously benefiting from the funding he demagogues.

To demonstrate that it’s responsibly taking care of the oil spill and listening to public complaints, BP has touted the fact that it has set up call centers to handle the response. However, one of the operators at the BP Call Center in West Houston has revealed that she and the other 100 employees are just PR props; BP isn’t actually doing anything with the thousands of calls it receives:

“We take all your information and then we have nothing to give them, nothing to give them,” said Janice.

Janice said calls about the oil disaster are non-stop and that operators are just warm bodies on the other end of the phone.

“We’re a diversion to stop them from really getting to the corporate office, to the big people,” said Janice. … Because the operators believe the calls never get past them, some don’t even bother taking notes.

Watch it:

BP told KHOU in Houston that it has received “more than 200,000 phone messages from the Call Center in Houston,” but it couldn’t “say just what percentage of calls is returned.”

CAP Senior Fellow Tom Kenworthy and the Wonk Room’s Brad Johnson have written that “[f]ederal agencies, not BP, should handle spill response hotlines for volunteers, technology ideas, affected wildlife, and others. Full call records need to be logged with incident reports and technology ideas presented publicly on dynamic websites.” (HT: Raw Story)

One of (if not the) most reviled portions of financial regulatory reform for the banking industry is a provision authored by Sen. Blanche Lincoln (D-AR) that would require banks to spin-off their derivatives trading desks into separate entities, with their own capital, or lose their access to federal insurance. Sec. 716 has not only caused the banks consternation, but has garnered the opposition of the Treasury Department, the Federal Reserve, and the Federal Deposit Insurance Corp.

For months, the financial services industry has been assuming that the provision would be stripped out of the legislation, first on the Senate floor and then in conference committee. However, according to the Financial Times, the banks are readying themselves to ultimately lose this debate, as former Federal Reserve Chairman Paul Volcker — who has been a key player in the regulatory reform fight — has softened his initial criticism of Lincoln’s measure:

Defeat, which would be a further blow to Wall Street, has been made more likely by Paul Volcker, the influential former Federal Reserve chairman, softening his opposition to the provision…Although he declined to say whether he now supported it, Mr Volcker told the Financial Times that his earlier criticism was based on the belief that a stricter spin-off was in the works and it was now a “relevant question” whether damage would be done if swaps desks could be kept within a bank holding company. “I tend to think of the bank holding company as the relevant organisation,” he said.

As David Dayen put it at Firedoglake, “I see nothing here to guarantee the preservation of Section 716. But this is clearly a crack in the establishment, which lined up quickly and united their opposition to the measure.” Indeed, with the regulators all weighing in against it, it will still be a heavy lift to get the provision into the final bill, but Volcker saying that it could be workable is undeniably a boost, as is the support of Kansas City Federal Reserve President Thomas Hoenig, who said last week that trading in derivatives is “generally inconsistent with the funding subsidy afforded institutions backed by a public safety net.”

This provision means real money for the biggest banks, particularly Bank of America and JP Morgan, so they’ve been “apoplectic” about it. But they’re dealing with both the economic argument for the spin-off, which rightly asserts that banks should not be able to benefit from a federal backstop while trading in risky instruments for their own benefit, and the political reality that Lincoln has a tough reelection campaign coming and needs to score some legislative victories.

Volcker’s softening reflects the reality that the spin-off provision would not prevent banks from hedging risks via derivatives (like early reporting said it might), but only from making markets. In fact, that’s one of the more attractive features of the spin-off: the banks will become customers in the derivatives market, so they’d have as much incentive as anyone else in creating a functional market with low prices.

Volcker said that he is canceling his summer vacation to be on-hand to provide advice to lawmakers as financial reform enters its endgame. “Normally I go to Canada — where the banking system is all healthy and straightforward,” he said.