During the debate over the Dodd-Frank financial reform law — which President Obama signed one year ago today — Republicans warned that the law would have a debilitating effect on the economy and undermine the “safety and soundness” of banks (code for cutting too deeply into their profits). But as the Los Angeles Times noted this week, banks “have been reporting billions of dollars in profits — including a record quarter for Wells Fargo & Co. — with nary a word about how the so-called Dodd-Frank financial reform law was hindering them”:

On Tuesday, Wells Fargo, the nation’s third-largest bank, posted record earnings of $3.9 billion for the second quarter. JPMorgan Chase & Co. reported last week that its revenue and profit were higher in the first half of this year than in the first six months last year, before Dodd-Frank was passed. Nor did the law seem to deter Goldman Sachs Group Inc., Bank of America Corp. and Citigroup Inc.

As Mother Jones’ Kevin Drum put it, “Dodd-Frank hasn’t taken full effect yet — nor have new capital requirements — but this is an ominous sign anyway. In the long run, if banks end up as profitable as they were before the law was passed, it almost certainly means that dangerous behavior really hasn’t been reined in significantly.” Indeed, several key regulations — including the Volcker rule, aimed at cutting down on risky trading — aren’t on the books yet, but there’s little reason to believe that the new rules will have any of the doomsday effects of which the banks were warning.

Even so, Republicans are doing everything they can do to undermine the law (while acknowledging that repeal is not in the cards with President Obama in the White House). Here are some of the main thrusts of their attack:

– Weaken the Consumer Protection Bureau: The House plans to vote today on a bill that would significantly weaken the Bureau (which Obama has vowed to veto). Senate Republicans have said they won’t confirm any bureau director until the structure of the bureau is changed to be more bank-friendly. The bureau officially opened for business today.

– Water down derivatives reform: House Agricultural Committee Chairman Frank Lucas (R-OK) plans to introduce legislation weakening the derivatives title of the laws, providing more exemptions from the law’s requirements that derivatives deals be transparent and cleared by regulators.

– Let banks keep passing on risk: One important provision of the bill requires lenders to hold onto a portion of loans that they make, so that they can’t divorce themselves entirely from loans with low standards. Republicans have tried to weaken this provision.

All in all, Dodd-Frank is still a work in progress, and Republicans are doing their best to slow that progress down as much as posible.

The Commodity Futures Trading Commission — which oversees the nation’s commodities markets — announced yesterday that it is going to allow for an additional month of comments on the rules governing derivatives that it is implementing under the Dodd-Frank financial reform law. According to Dodd-Frank, the CFTC is supposed to have finished implementing a new regulation regime for derivatives by July, but CFTC Chairman Gary Gensler has already said that the deadline will be missed.

House Republicans been pushing for the CFTC to delay derivatives reform for months, claiming that the rules were being implemented without enough input from businesses and the financial sector. So has this delay assuaged their concern? As the Wall Street Journal noted, it certainly hasn’t:

Republican Rep. Frank Lucas of Oklahoma, chairman of the House Agriculture Committee, which oversees the CFTC, said the agency’s decision to extend the comment period wasn’t enough to address his concerns.

“To expect that market participants can comment on dozens of complex regulations and their cumulative impact on the marketplace meaningfully in 30 days is consistent with the process we’ve seen at the CFTC, a bare minimum and check-the-box approach. We owe more diligence to the economy,” he said in a statement.

Derivatives, remember, were the financial instruments that brought down, among others, the insurance giant AIG (necessitating a government rescue). The Financial Crisis Inquiry Commission reported that derivatives were “at the center of the storm” during the financial crisis.

Despite the role these instruments (and the huge financial firms that used them) played in bringing the economy to the brink, Republicans have been attempting to slow-walk derivatives reform for months, both legislatively and by denying the CFTC funding to implement Dodd-Frank. House Republicans earlier this month introduced a bill to delay derivatives reform for 18 months.

But as CFTC Commissioner Bart Chilton said yesterday, “dangers” still exist in the derivatives market. “There are dangers out there in the OTC world that we need to get a handle on. There are some that want to run out the clock. Many of these people are people who opposed [Dodd-Frank] to begin with want to run out the clock until the next election. Maybe consumers won’t be as hot on reform then,” Chilton said.

The House Financial Services Committee today held a hearing on the derivatives title of the Dodd-Frank financial reform law. The new derivatives regulations in Dodd-Frank are key to bringing regulation and oversight to this huge ($600 trillion) and largely unregulated market.

Republicans fought the new derivatives regulations, and Dodd-Frank more generally, tooth and nail, falsely claiming that regulating derivatives would have a detrimental effect on everything from energy prices to the makers of Snickers bars.

Today, Republicans broke out a new piece of evidence meant to dissuade the Commodity Futures Trading Commission — which has been charged with implementing the derivatives title of Dodd-Frank — from actually following through with the law’s requirements. They cited “a recently released report, backed by pro-business groups, that claims a hypothetical three percent margin requirement [for derivatives trades] could cost 130,000 jobs.” Here’s Financial Services Committee Chairman Spencer Bachus (R-AL):

One study, released just yesterday, concludes that upwards of 130,000 jobs could be lost if U.S. regulators impose new restrictions on derivatives transactions too broadly. Others may not see a loss of jobs, but will see increased costs because of these regulations — costs that will be passed along to consumers.

For one thing, Republicans are trying to convince regulators to exempt non-financial companies from derivatives requirements when such exemptions already exist. But for another, they are relying on a thoroughly discredited study circulated by, among others, the U.S. Chamber of Commerce and the Business Roundtable, two of the banking industry’s chief apologists.

The study, conducted by Keybridge Research on behalf of the Coalition for Derivatives End Users, which is an umbrella group that includes the Business Roundtable and the Chamber of Commerce, claims that derivatives regulation will cause 130,000 jobs to be lost. As MIT professor John Parsons wrote, the calculation left out a key step:

A regulation that requires using cash instead of credit costs the company on one side, but loosens its constraints on the other. The net effect on the company’s free cash flow is zero. Keybridge’s oversight here is a first order mistake. One could argue that the cash requirement is costlier than credit, but then you would have to figure out by how much. That would be an extra, very difficult step in the calculation, and any reasonable estimate for the differential would drive the headline number down enormously, possibly to zero.

“This is not any kind of research. This is people who want to overleverage and risk the system — because, once again, they will get the upside and taxpayers/all citizens get the downside,” added MIT’s Simon Johnson.

In fact, the firm that the Chamber and Roundtable relied upon has been touting its affiliation with various scholars — including Nobel Prize winner Joseph Stiglitz — without those scholars knowing it. As the New York Times’ Andrew Ross Sorkin noted, “As I made calls about the relationship between Keybridge and the academics, names mysteriously disappeared from the group’s site.” Stiglitz himself said of Keybridge’s study: “The argument they make is particularly foolish…Companies are sitting on $2 trillion of cash. It’s just an embarrassment that they’d use that argument in the current context.”

Today, the Financial Crisis Inquiry Commission — which was charged with examining the causes of the 2008 financial meltdown — released its final report. The Commission laid out all the excruciatingly painful details of a financial system marred by poor incentives and excessive risk, while explaining all the ignored warnings, regulators asleep at the wheel, and predatory loans which fed into a pipeline of shadowy investments that imploded the balance sheets of the country’s biggest banks. The ultimate message of the report is “this financial crisis was avoidable.”

Of the many things that contributed to the crisis, the Commission noted that derivatives — the financial instruments that brought down, among others, American International Group — “were at the center of the storm“:

The enactment of legislation in 2000 to ban the regulation by both the federal and state governments of over-the-counter (OTC) derivatives was a key turning point in the march toward the financial crisis…One type of derivative — credit default swaps (CDS) — fueled the mortgage securitization pipeline. [...]

Second, CDS were essential to the creation of synthetic CDOs. These synthetic CDOs were merely bets on the performance of real mortgage-related securities. They amplified the losses from the collapse of the housing bubble by allowing multiple bets on the same securities and helped spread them throughout the financial system. Goldman Sachs alone packaged and sold $73 billion in synthetic CDOs from July 1, 2004 to May 31, 207.

“The existence of millions of derivatives contracts of all types between systemically important financial institutions — unseen and unknown in this unregulated market — added to uncertainty and escalated panic, helping to precipitate government assistance to those institutions,” the Commission found.

Fortunately, the Dodd-Frank financial regulatory reform law passed last year included a significant upgrade in the regulation of derivatives. In fact, the derivatives title is one of the strongest parts of the law.

However, House Republicans have taken it upon themselves to undermine derivatives reform by both refusing to fund the agency charged with implementing the new rules, the Commodity Futures Trading Commission, and trying to publicly shame the CFTC into slowing down its efforts. Bloomberg reported today that House Agricultural Committee Chairman Frank Lucas (R-OK) and Rep. Michael Conway (R-TX) are accusing the CFTC of “‘prioritizing speed’ and creating an ‘irrational sequence’ of rules” as it attempts to rein in the derivatives market.

The derivatives market was essentially the Wild West of the financial world before the financial crisis: unregulated, unrestrained, and ultimately unsustainable. But with the effects of the financial meltdown and the Great Recession that followed still being felt by families across the country, the GOP is throwing up roadblocks to prevent new rules from coming online.

Incoming House Financial Services Chairman Spencer Bachus (R-AL) told the Birmingham News this week that “in Washington, the view is that the banks are to be regulated, and my view is that Washington and the regulators are there to serve the banks.” And Bachus plans to provide that service by trying to slow down a whole host of measures being implemented under the Dodd-Frank financial reform law.

One of the targets that Bachus has in his sights is derivatives reform, the title of the Dodd-Frank law that aims to bring some prudent regulation to the currently unregulated derivatives market, which played a significant role in the 2008 financial meltdown. During the debate over Dodd-Frank, Bachus had an utterly incoherent position on derivatives reform, but that hasn’t stopped him from saying that derivatives reform is “one of the job-killing provisions of Dodd-Frank that needs to be addressed.”

And Bachus is getting some help from his fellow Republicans, who are threatening to bog down rule-writing by the Commodity Futures Trading Commission, which is charged with implementing derivatives reform. First, comes Rep. Scott Garrett (R-NJ), who will be chairing the subcommittee on capital markets next year:

“The rule-making bodies, especially the CFTC, seem to be eager to move along at this faster than anyone can keep up with,” said Mr. Garrett, who will try to slow the process with heightened congressional oversight.

And then Reps. Jerry Moran (R-KS) and Frank Lucas (R-OK):

Republicans on the panel said CFTC should move more slowly. Frank Lucas, who will become Agriculture Committee chairman in January, said he was “willing to consider an easing of statutory deadlines.” Jerry Moran, who will become a senator in January, said CFTC was rushing to issue a rule before it has adequate information on market size or appropriate limits.

Michael Greenberger, a former CFTC division director and University of Maryland law professor, called these complaints “a red herring offered by Wall Street to delay implementation.” But it’s not only Congressional Republicans who are trying to slow-walk reform. Republican appointees to the CFTC itself are doing the same thing, according to the Wall Street Journal:

The CFTC’s two Republican commissioners say the agency is moving too fast. Commissioner Jill Sommers said she supports giving the agency another year to write the rules.

The derivatives title is one of the strongest in the Dodd-Frank law, and getting it into place will bring much-needed light to a market that is several times the size of the entire U.S. economy. But Republicans, who did nothing to contribute to the financial reform debate, are trying to throw as many wrenches into the gears as they can, while Wall Street reaps its second-highest amount of revenue ever.

Rep. Spencer Bachus (R-AL), who will likely be the next chairman of the House Financial Services Committee due to the Republican victory last night, has signaled his intent to weaken a series of provisions in the Dodd-Frank financial reform law, including the Volcker rule and the resolution authority for dismantling failed banks. And he told the Wall Street Journal this morning that he also “plans to rewrite the derivatives provisions” in the law:

“That’s one of the job-killing provisions of Dodd-Frank that needs to be addressed,” the Alabama Republican said in an interview Wednesday morning, calling the provisions “overly expansive.” Mr. Bachus said the new derivatives rules, which will require most routine swaps to be traded on exchanges and routed through clearing houses, will redirect as much as $1 trillion from the U.S. economy, draining capital from the financial system that could be used for loans or job creation.

During the debate over Dodd-Frank, Bachus had an utterly incoherent position on derivatives reform, calling for transparent derivatives markets while opposing all reforms that would increase market transparency. Now, it seems, he’s ready to carry Wall Street’s water by dialing back the requirements designed to bring currently unregulated derivatives trading out of the dark.

This is troubling, as the derivatives title is one of the strongest parts of the Dodd-Frank bill, bringing much needed regulation to a portion of the financial system that suffered from a severe lack of oversight. Remember, it was AIG’s issuing of billion in credit default swaps that it couldn’t honor that led to its downfall; Lehman Brothers was also sunk by exposure to derivatives. The derivatives title of Dodd-Frank — authored by outgoing Sen. Blanche Lincoln (D-AR) — sets up exchanges so that derivatives must be traded publicly (like stocks) and employs clearinghouses to ensure that both parties in a derivatives trade have adequate collateral backing it up.

What House Republicans will likely aim to do — if their rhetoric during the financial reform debate is any indication — is try to grant wide exemptions to the exchange and clearing requirements, letting all sorts of activity that is purely speculative continue unabated.

But Commodity Futures Trading Commission Chairman Gary Gensler, who has been one of the staunchest supporters of strong derivatives reform, is pushing back, saying the election yesterday won’t interrupt the CFTC’s rule-writing effort. “Any regulatory agency is obliged to follow the statute and what Congress wrote, and that’s what we’ll do,” Gensler said.

One of the legitimate criticisms of the Dodd-Frank financial regulatory reform bill that passed this year is that it leaves a lot of the details of reform up to regulators, instead of laying out hard-and-fast rules. There are pros and cons to this approach, but one of the big drawbacks is that the rule-making happens when the subject has faded from public view, giving the financial services industry even more influence over the process than it already has.

Case in point, the country’s biggest banks have been meeting with officials at the Federal Reserve in an attempt to shape the new rules governing derivatives trading:

Goldman Sachs Group Inc., Citigroup Inc. and others have also discussed tough rules for derivatives with government officials. Citi executives, meeting with the Fed on Aug. 18, expressed concerns about the effect of the new rules on U.S. firms. “Citigroup representatives also expressed concerns about a narrow interpretation of the definition of hedging and the importance of retaining their ability to hedge across markets,” the meeting summary prepared by the Fed said.

Non-financial companies and lobbying groups are also trying to influence the new derivatives rules, including the American Petroleum Institute and the U.S. Chamber of Commerce.

First, I’m glad to see that these meetings were disclosed relatively quickly. Other bank regulators, including the FDIC, have been planning to make a concerted effort to disclose their meetings with private sector representatives regarding the implementation of Dodd-Frank, and it’s good to see the Fed follow suit.

But on to the substance. The derivatives title of Dodd-Frank is one of the better parts of the bill, bringing much-needed transparency to an unregulated market and restricting some of the riskier derivatives trading in which banks can engage, by forcing them to move certain activities into a separately capitalized subsidiary (although this provision was watered down from a much-stronger one at the very last minute). But activities that qualify as related to hedging risk don’t have to be walled off.

Therefore, it’s in the banks’ interest to have as much activity as possible qualify as hedging, which is what these meetings seem to have been about. But the wider these definitions are, the less effective Dodd-Frank is going to be and the more risky trading will occur in the heart of the financial system. The added lobbying of the Chamber and API, which both falsely portrayed the effect that financial regulation would have on corporations while negotiations were ongoing, is only going to tip the scales in favor of a wider definition and more risk in the system.

If regulators don’t craft strong rules during this implementation stage, financial reform isn’t going to amount to much. And, sadly, there’s no logical counterweight that has as much at stake in the discussion.

This week, Pat Toomey, Pennsylvania’s Republican Senate candidate, has experienced a bit of selective amnesia regarding his often full-throated support for privatizing Social Security. However, on the campaign trail Wednesday he was not at all coy about his support for deregulating derivatives on Wall Street, the very instruments that helped bring down the financial system.

In 2000, former Sen. Phil “mental recession” Gramm (R-TX) attached the Commodity Futures Modernization Act to an unrelated, 11,000 appropriations bill which was passed “on a Friday evening two days after the Supreme Court handed down its Bush v. Gore ruling and as Congress was rushing home for Christmas.” The bill ensured that the growing market in over-the-counter derivatives, including credit default swaps, stayed entirely unregulated, against the advice of people like former Commodity Futures Trading Commission Chair Brooksley Born (who accurately predicted the havoc derivatives would cause).

Toomey — then a member of the House of Representatives — voted for that bill, and said that he would do it again, as “that bill did absolutely nothing to cause the financial crisis”:

“That bill did absolutely nothing to cause the financial crisis, and no credible person has tried to make that argument,” Toomey said…Asked whether he’d vote for it again, he said: “Yes. I think all 377 (House members) would vote for it again.”

Of course, plenty of credible people — including Nobel Prize winner Joseph Stiglitz — have pointed to the destruction wrought by the lack of derivatives oversight. By keeping regulators away from the OTC derivatives market — which is several times the size of the entire U.S. economy — the Commodity Futures Modernization Act set the stage for the financial crisis and huge government bailouts of 2008, particularly that of the insurance giant/hedge fund American International Group, as David Min and I explained:

Lehman Brothers Inc. and insurance giant American International Group’s inability to honor their many billions of dollars in credit default swap derivative obligations caused investors to question the value of the many financial instruments tied to credit default swaps, causing a classic run on the bank situation for the unregulated parts of the financial system. It was this run on the so-called “shadow banking system” — which performs the functions of banking but outside the regulatory safeguards in place for banks — that led to the bailout of AIG.

Because of the bill that Toomey backed, this huge market grew and grew entirely out of the view of regulators, and was so opaque that even the financial institutions involved in it were unclear as to what was going on.

The Dodd-Frank financial reform bill that was signed into law this year brings the derivatives market out of the dark and sets up a mechanism for ensuring that financial firms trading derivatives have adequate collateral backing them up. So would Toomey advocate that we dismantle these common sense safeguards?

In the 1990′s, Brooksley Born, who chaired the Commodity Futures Trading Commission at the time, tried to warn federal bank regulators, including Federal Reserve Chairman Alan Greenspan, about the dangers of over-the-counter derivatives. To put it mildly, her alarm-sounding did not go over well:

Born’s proposal stirred an almost visceral response from other regulators in the Clinton administration, as well as members of Congress and lobbyists. The economy was sailing along, and the growth of derivatives was considered a sign of American innovation and a symbol of the virtues of deregulation. The instruments were also a growing cash cow for the Wall Street firms that peddled them to eager takers. Ultimately, Greenspan and the other regulators foiled Born’s efforts, and Congress took the extraordinary step of enacting legislation that prohibited her agency from taking any action.

Of course, as we now know, the huge, opaque derivatives market helped to unleash a financial cataclysm, particularly by imploding the insurance giant AIG. “No federal or state public official had any idea what was going on in those markets, so enormous leverage was permitted, enormous borrowing,” Born said. “There was also little or no capital being put up as collateral for the transactions.”

Since Born saw the problems with the derivatives market where so many others didn’t, it’s significant that she has lent her support to the financial regulatory reform package that passed the House this week and is due for a vote in the Senate when the July 4th recess ends. “[The bill] is an important step forward in regulating the over-the counter derivatives market and I very much hope it is enacted into law,” Born said.

Despite the unfortunate watering down of the provision forcing banks to spin their derivatives trading desks into separately capitalized entities, the derivatives title of the Dodd-Frank financial reform bill is quite strong. It places standardized derivatives trades onto public exchanges (like the stock exchange) and forces customized trades to be cleared by clearinghouses (avoiding an AIG-type situation where one party to a trade has insufficient capital on hand to back it up). This is getting lost in the drama surrounding Sen. Scott Brown’s (R-MA) hemming and hawing over the bill, but it’s an important set of reforms that needs to become law.