by Kermit Schoenholtz and Paul Wachtel
The derivatives rules in the Senate financial reform bill pose a serious threat to the financial system because they leave critical institutions - including but not limited to derivatives clearinghouses - without a lender of last resort. A major feature of the legislation prohibits any "swaps entity" from receiving federal assistance such as deposit insurance or access to the Federal Reserve's lending facilities. The bill will force banks to spin off their derivatives activities into separate corporate entities. Yet, sweeping the risks inherent in derivatives trading off bank balance sheets does not make them disappear.
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