Foreign currency traders are rigging the market in which they trade in order to bilk clients and maximize profits, five sources familiar with the practice told Bloomberg. The news extends an industry pattern of insider manipulation that includes oil markets and a key global interest rate.

Traders collude with one another to move exchange rates by concentrating specific types of transactions at specific times, the sources say. Since the banks are operating both for themselves and on behalf of clients, traders in on the rate rigging can suck huge amounts of money out of their own clients and into the firm’s grasp:

One trader with more than a decade of experience said that if he received an order at 3:30 p.m. to sell 1 billion euros ($1.3 billion) in exchange for Swiss francs at the 4 p.m. fix, he would have two objectives: to sell his own euros at the highest price and also to move the rate lower so that at 4 p.m. he could buy the currency from his client at a lower price.

He would profit from the difference between the reference rate and the higher price at which he sold his own euros, he said. A move in the benchmark of 2 basis points, or 0.02 percent, would be worth 200,000 francs ($216,000), he said.

The market for foreign currency trading (FX) is massive, with $4.7 trillion in volume each day. While the mechanism for setting marketwide FX rates is theoretically less vulnerable to manipulation than the equivalent mechanisms in oil trading and inter-bank interest rates, Bloomberg explains, the market is dominated by just four of the world’s largest banks. The concentrated market share of Deutsche Bank, UBS, Barclays, and Citigroup make collusion both possible and profitable.

In May, a longstanding investigation into price rigging by oil traders culminated in raids of British Petroleum, Royal Dutch Shell, and Statoil offices in Europe. Oil price rigging has spillover effects for all other commodity prices, since shipping relies on fuel, and is especially distorting for food prices. Last year, an investigation revealed traders were manipulating something called the London Interbank Offer Rate, or LIBOR, which is a key driver of about $800 trillion worth of financial transactions the world over. LIBOR manipulation may have cost U.S. taxpayers billions at the federal level, and it was a major contributor to budget collapses and ensuing public service cuts in cities like Detroit and Baltimore.

On Monday, a regulatory body created by the Dodd-Frank reforms of 2010 named the first set of non-bank financial companies that will face the most stringent provisions of the Wall Street reform package. Since the so-called “shadow banking” sector was the epicenter of the complex and risky behavior that caused the financial crisis to spill over into the broader economy, the announcement constitutes significant progress for meaningful Wall Street reform. The news means that three major financial companies that do not take deposits – AIG, Prudential Financial, and GE Capital – will be unraveled by the government rather than bailed out should they go bankrupt in the future.

But the Financial Stability Oversight Council’s (FSOC) announcement was immediately mischaracterized as making bailouts more likely by Rep. Jeb Hensarling (TX), Chairman of the House Financial Services Committee. In a statement, Hensarling claimed that “hardworking taxpayers are at greater risk of being forced to fund yet another Wall Street bailout as their government officially designates more large companies as being ‘too big to fail’.”

Hensarling’s statement is premised on a misconception of the Dodd-Frank provision known as Orderly Liquidation Authority. That misconception is hardly limited to Hensarling. It was included in the GOP’s budget last year, and it dates back to industry-funded talking points drafted by Republican strategist Frank Luntz back when Dodd-Frank was being written.

The Orderly Liquidation Authority is the government’s tool to take over and unwind a failing financial company, rather than bailing it out. Federal Reserve Chairman Ben Bernanke has said such a policy could have forestalled the 2008 bailouts, and the Treasury Secretary who oversaw those bailouts agrees. Experts disagree about whether or not the system is sufficient to remedy the too-big-to-fail problem, with many arguing that further restrictions on the size and behavior of giant financial firms are necessary. But the GOP claim that Dodd-Frank enshrines bailouts and too-big-to-fail in law gets a complicated policy backwards.

Meanwhile, the announcement about AIG, Prudential, and GE Capital means that they will also be subject to stricter regulations than smaller, less systemically risky firms. “Systemically important financial institutions,” a list the three now find themselves on, will be subject to new Federal Reserve oversight and required to draft a “living will” to be used in dismantling them should they fail. Other specifics of the requirements they face have yet to be settled. They have 30 days to appeal the decision.

A group of European countries that set out in 2012 to implement a 0.1 percent tax on financial transactions is scaling the plan back, Reuters reported Thursday, after the industry “lobbied furiously against a scheme aimed at making them contribute to the costs of the financial crisis.” Unnamed sources close to the process told the wire service that the European Commission now seeks just a 0.01 percent tax on a smaller subset of financial transactions, and would hope to raise the rate and expand its reach “on a staggered basis” in the future.

While slashing the proposed rate by a factor of ten would dramatically reduce the revenues the tax would provide to cash-strapped governments in the region, the bigger problem is the reported shift to exempting the riskiest, least-productive types of financial behavior. Reuters’ sources say derivatives trades would no longer be taxed initially, and that the revised proposal would essentially punt the derivatives question into the future.

The idea behind the microscopic tax on trades dates to the Great Depression-era desire to curb “the predominance of speculation over enterprise” that had blown up the economy. Eight decades later, with the world still climbing out of a Great Recession caused in part by technologically-accelerated speculation, the idea is gaining renewed traction around the globe. As markets become increasingly beholden to computers that can execute thousands of trades every second, they grow dangerously volatile, as demonstrated in 2010 by a “flash crash” caused by high-frequency traders (HFTs). The European reforms that are now decaying sought in part to guard the broader economy from the risks of such crashes by discouraging HFTs.

Similar proposals from Progressive Caucus members in the U.S. House have yet to catch on more broadly among lawmakers, although a long list of economists, business tycoons, faith leaders, and other public figures have endorsed the idea. But as in Europe, the policy’s American targets have ratcheted up their efforts at influencing policy. HFTs spent nearly 8 times as much to influence elections in 2012 as they spent in 2008.

One version of the American financial transactions tax, proposed by Rep. Keith Ellison (D-MN), included a separate micro-tax on the market in derivatives, which was the epicenter of the financial crisis that precipitated the great recession. Another version set a flat rate for all financial transactions.

While the designs of the proposals vary, the arguments against them are generally the same: raising the cost of trading will hurt growth. But as the Center for Economic and Policy Research’s Dean Baker has shown, the benefits of taxing financial transactions seem likely to outweigh the costs, and reasonable, enforceable taxes of this sort would help create economic growth that’s more sustainable, and possibly even more robust.

Three years after Congress passed sweeping reforms of Wall Street, the industry has successfully widened a variety of cracks in the Dodd-Frank law. But credit for the industry’s success at watering down the landmark legislation doesn’t just go to well-heeled lobbyists – regulators and lawmakers are helping.

The New York Times’s Dealbook blog reports this morning on the most predictable sort of industry subversion of the law’s intent: Citigroup essentially wrote a bill that would keep taxpayers on the hook for banks’ bets on the complex, high-stakes financial products known as derivatives. The derivatives market was central to the financial collapse. Added together, the total on-paper value of the derivatives bets outstanding in 2010 was roughly 23 times greater than the entire world’s economic output. Dodd-Frank included a requirement that financial institutions take their derivatives gambling to separate institutions not backed by federal deposit insurance.

But the House Financial Services Committee passed a bill undoing that reform in early May. “Citigroup’s recommendations were reflected in more than 70 lines of the House committee’s 85-line bill,” Dealbook reports, and “two crucial paragraphs” were taken wholesale from the industry.  While the change is supported by such heavyweights as Federal Reserve Chairman Ben Bernanke and Dodd-Frank namesake Barney Frank, Americans for Financial Reform director Marcus Stanley notes that it “restores the public subsidy to exotic Wall Street activities.”

While bank lobbyists exist to advocate for bank interests, legislators and financial regulators work on the taxpayer’s behalf. But with battles over Dodd-Frank ongoing, the House Financial Services Committee is a plum assignment for legislators because of the industry cash the seats invite. In the case of the Citigroup-penned derivatives bill, supporters “received twice as much in contributions from financial institutions compared with those who opposed” the proposal, Dealbook notes.

Elected officials aren’t the only public servants using positions critical to Dodd-Frank’s survival to weaken its protections for taxpayers. And as financial reporter David Dayen wrote in The American Prospect on Tuesday, some regulators are instead working to protect Wall Street. Dayen’s prime example is a Commodity Futures Trading Commission member named Mark Wetjen, who forced the CFTC into a compromise that undermines Dodd-Frank’s effort to bring transparency to the derivatives market. Instead of big reform, like forcing banks to make derivatives trades publicly or requiring actual competition in that market, Wetjen ensured the absolute minimum change to how derivatives get originated. As a result, the law that was supposed to dramatically reshape the derivatives market and mitigate its risks to the real economy will instead impose only “the smallest possible increase” in competition and transparency, Dayen noted.

Wetjen, who is rumored to be the next head of the CFTC, has been hard at work watering down other Dodd-Frank reforms as well:

He asked for several bank-friendly changes to planned derivatives rules, delayed rules by refusing to commit to voting for them, advocated giving Wall Street additional time to comply, publicly announced concerns with [Chairman Gary] Gensler’s proposed regulations in a speech to the main trade lobby for the industry (the International Swaps and Derivatives Association), and generally took Wall Street’s side, both in public and behind the scenes. In February, word leaked that Wetjen wanted to weaken the RFQ proposal. He has become the key swing vote on the panel, threatening to side with Republicans and vote down rules unless his changes are implemented.

Between lobbying dollars and industry-friendly regulators, the financial industry is succeeding at undermining the government’s response to the biggest economic collapse since the Great Depression.

The biggest banks were already huge before the financial crisis, and concentration in the banking industry was in fact one of the causes of the crash. Yet they have gotten even bigger since then. Just 12 banks, 0.2 percent, control nearly 70 percent of total bank assets, and the 20 biggest hold assets equal to nearly 85 percent of the country’s entire economic output.

This has many concerned that the problem of too big to fail still hasn’t been resolved since the passage of the Dodd-Frank financial reform act. Worse, banks may now be too big to jail, as the Justice Department has warned that going after potentially illegal behavior could have negative economic consequences.

These problems led Sen. Elizabeth Warren (D-MA) to grill Treasury Secretary Jack Lew at a Senate banking committee hearing on Tuesday about whether the time has come to cap the size of banks and/or break them up:

As she noted, the four biggest banks, which were already considered too big to fail before the crisis, are now 30 percent larger. “When we see the largest financial institutions getting bigger and bigger…it tells us that we are clearly not on the path to resolving too big to fail,” she noted. This is potentially putting the economy at risk. Later she cautioned that “we’re playing with the U.S. economy here, the worldwide economy.”

Yet no action has been taken to address this specific problem. “How big do the biggest banks have to get before we consider breaking them up?” she asked Lew. “Do they have to double in size? Triple in size? Quadruple in size?” While Dodd-Frank is in the process of being implemented and these changes to the law may mean some changes, the continuing stream of scandals in the sector show that “they have not changed their risk bearing practices nor have they decided that they’re suddenly going to start following the law,” she said.

Warren is not alone in cautioning that too big to fail is still a potential problem. Federal Reserve Chairman Ben Bernanke recently agreed that something needs to be done. Sens. Sherrod Brown (D-OH) and David Vitter (R-OH) also introduced legislation in April to rein in megabanks by imposing strict capital requirements, among other changes.

The European Union is investigating price-rigging in the global oil market, a widely-known yet unaddressed problem. That investigation hit a peak with last Tuesday’s raids of British Petroleum, Royal Dutch Shell, and Statoil offices. By the end of the week, Sen. Ron Wyden (D-OR) asked the U.S. Justice Department to undertake its own investigation into the effects on U.S. consumers.

Day-to-day oil transaction prices are based on benchmarks set by private firms, and the EU investigation focuses on the firm Platts, whose oil price benchmarks are “the most influential,” according to CNN Money. By manipulating individual transations late in a given day, traders can tweak the next day’s benchmark to increase their profits on other deals.

This looks to be very similar to last year’s massive, under-covered LIBOR scandal, in which megabanks colluded to gear a supposedly market-driven interest rate toward their own interests. CNN Money explains the shared pitfalls of basing daily price-setting on voluntarily-provided, unaudited data from the biggest players in the two industries:

“[T]hey are both widely used benchmarks that are compiled by private organizations and that are subject to minimal regulation and oversight by regulatory authorities,” the review, led by former financial regulator Martin Wheatley, said in August . “To that extent they are also likely to be vulnerable to similar issues with regards to the motivation and opportunity for manipulation and distortion.” […]

There are also concerns about the fact that reporting to Platts is done by traders voluntarily. In a report issued in October, the International Organization of Securities Commissions — an association of regulators — said the ability “to selectively report data on a voluntary basis creates an opportunity for manipulating the commodity market data” submitted to Platts and its competitors.

LIBOR manipulation impacts $800 trillion in assets globally. Similarly, oil prices are a core driver of the price of nearly every consumer good, especially food. LIBOR manipulation helped force massive cuts to public services in American cities by blowing up the balance sheets of those cities, and the apparent manipulation of oil prices is likely to have a similarly long and destructive reach.

The shared features of the LIBOR scandal and the burgeoning price-rigging investigation in the oil industry suggest a policy lesson: Left to themselves, the biggest industries in the world tend to cheat in their own interests, at great cost to consumers.

The LIBOR scandal, regarded as the largest financial fraud scandal in history, led to over $2.5 billion in fines and forced changes in the U.K. Under a law passed earlier this year, the process by which LIBOR is set will receive tighter government oversight from a new agency. But that change is insufficient, according to the American head of the Commodities Futures Trading Commission, and fraud remains a possibility.

These structural incentive problems crop up in myriad other markets. Finance expert Barry Ritholtz has a roundup of dozens of other types of market manipulation by insiders, far beyond oil and LIBOR. Privately and voluntarily generated core prices tend to discourage competition at the expense of consumers, as economist Costas Lapavistsas argued earlier this year in the Financial Times. “The answer,” according to Lapavistas, “is public intervention in the rate-setting process, whether through the central bank or otherwise.”

A week after a bipartisan group of lawmakers on the House Financial Services Committee overwhelmingly approved a rollback of certain financial reforms contained in the Dodd-Frank Wall Street Reform Act, one of the Senate’s biggest consumer advocates is pushing back.

Massachusetts Sen. Elizabeth Warren (D) came out swinging against the repeal of new rules meant to regulate derivatives, the complex financial instruments that were at “the center of the storm” that caused the financial crisis. The rules shouldn’t be weakened or repealed just because big banks want to see them eliminated, Warren argued Thursday, The Hill reports:

“The big banks won some battles and lost some battles during the financial regulatory debate in 2009 and 2010, but their tune never changed and their lobbying never let up,” she said. “It is dangerous for Congress to amend the derivatives provisions of the Dodd-Frank Act without at the same time taking accompanying steps to strengthen reform and maintain the law’s equilibrium.”

One rule the package of legislation advanced by the House committee would eliminate is a “push out” provision that would limit derivatives trading at banks that receive federal backing. Similar to the Volcker Rule, another provision Wall Street largely opposes, it is aimed at making taxpayer-backed banks safer to avoid crises similar to the one that thrust the United States into a recession and led to a bailout of major banks in 2008.

Warren isn’t alone in her opposition to the rollback. The Obama administration has long opposed the repeal of the derivatives rules, and former Federal Deposit Insurance Commission chair Sheila Bair has said the swaps and derivatives rules need to be strengthened rather than weakened. Whether the rules will face a repeal vote in the Senate isn’t clear: the House passed similar legislation in 2012, only to see it die in the Senate without a vote.

Massachusetts Sen. Elizabeth Warren (D) isn’t letting regulators off the hook for their lack of prosecutions of Wall Street banks in the wake of the financial crisis. After using her initial Senate Banking Committee hearing to press regulators about whether big banks are “too big to trial,” Warren is doing so again — this time in a letter to the Securities and Exchange Commission, the Justice Department, and the Federal Reserve.

The letter questioned regulators’ willingness to pursue settlements instead of prosecutions, and asked them to provide any analysis to justify that practice, The Hill reports:

“I believe strongly that if a regulator reveals itself to be unwilling to take large financial institutions all the way to trial — either because it is too timid or because it lacks resources — the regulator has a lot less leverage in settlement negotiations,” Warren wrote in the letter.

“If large financial institutions can break the law and accumulate millions in profits and, if they get caught, settle by paying out of those profits, they do not have much incentive to follow the law.”

Warren isn’t alone in her criticism: Ohio Sen. Sherrod Brown (D) and Iowa Sen. Chuck Grassley (R) pushed the Justice Department over the notion that big banks have become “too big to jail” in January, and Grassley accused regulators of giving banks a “get out of jail free card” for their involvement in the crisis.

Prosecutions for financial fraud hit a 20-year low in 2011, and regulators largely turned to settlements to punish big banks after the crisis. But various settlements have allowed them to avoid admissions of wrongdoing, and the largest of the settlements — the mortgage and foreclosure fraud settlements — have been rife with problems that have allowed banks to game their requirements while homeowners have struggled to access required assistance.

The House Financial Services Committee advanced a package of bills Tuesday that would weaken major regulations included in the 2010 Dodd-Frank Wall Street Reform Act, doing so over the objections of the Obama Administration with bipartisan support.

The legislative package, which has been criticized by both current Treasury Secretary Jack Lew and his predecessor, consisted of six bills that would weaken the regulation of derivatives. Derivatives are the the financial instruments that were at the “center of the storm” that caused the financial crisis, according to the Financial Crisis Inquiry Commission. Nevertheless, those regulations have emerged as a key target for opponents of reform and the financial industry.

One of the most significant rules the package would weaken is the so-called “push-out” provision that would limit derivatives trading at banks and financial institutions that are insured by the federal government. But rather than weaken the push-out rules, Congress should be making them even stronger, former Federal Deposit Insurance Commission chair Sheila Bair told Bloomberg:

“If Congress wants to re-open Dodd-Frank on this question, if anything, they should push all derivatives activities (other than the banks’ own hedges) into affiliates outside of the insured bank,” Bair said in an e-mail. “This would force market funding of derivatives thus providing substantially greater market discipline than permitting them to be funded with insured deposits.”

Like the Volcker Rule, which would limit forms of risky trading at federally-insured banks, the push-out rule is meant to make the large institutions that were at the center of the financial crisis safer. But the Financial Services Committee, chaired by noted Dodd-Frank opponent Rep. Jeb Hensarling (R-TX), has repeatedly passed legislation weakening derivatives reforms since the law passed. At one point in 2012, there were nine separate pieces of legislation aimed at the regulation of derivatives pending in Congress. “These proposals threaten to create large oversight-free zones that could allow risky behaviors to flourish,” advocacy group Public Citizen wrote of such legislation in 2012.

The package of legislation isn’t expected to move forward in the Senate, according to Rep. Jim Himes (D-CT), one of the sponsors. But Congress isn’t just taking aim at the rules: in recent years, it has gutted the budget for the Commodity Futures Trading Commission, the agency tasked with enforcing the new derivatives rules.