The bill that was approved yesterday by the Senate Agriculture Committee correctly would let the Commodities Futures Trading Commission defer to state laws that limit the use of derivatives for purposes of speculation.

By doing so, the bill would effectively curb so-called "naked swaps," those that aren't traded on exchanges or cleared centrally and where neither party has an insurable interest at stake, because those swaps would no longer be enforceable in court. In other words, only a party using a swap to hedge could sue to go after its counterparty's assets if it failed to hold up its end of a deal.

This is seriously speculative stuff on my part. But I wonder if the other shoe that Carl Levin says is about to drop on Goldman has to do with its failure to disclose the fact that it received a Wells Notice from the SEC last July about the Abacus deal.

Yes, the bank claims it was immaterial, just as it claims was its lack of disclosure of hedgie John Paulson's role in helping to design the CDO to go south so he could profit by shorting the deal was immaterial.

The banking crisis may have made the phrase "moral hazard" a household term, at least in finance quarters. But there's actually a theoretical argument against the idea that providing banks with taxpayer subsidies encourages them to take risks they wouldn't otherwise shoulder.

The theory that subsidies do not (emphasis on "not") create moral hazard rests on the notion that banks will actually take less risk as a result of such guarantees against failure because taking more would jeopardize the future value of their banking charters.

Yes, that sounds strange to me, too. But there's a body of academic research that supports the idea. And it smacks of the same logic behind other theorizing about so-called "real options." 

Why is John Dugan still Comptroller of the Currency? (Skip to the second-to-last sentence of this item if you can't wait for the answer.) 

Today Dugan had his director of regulatory policy spinning Bloomberg on how tough the Office of the Comptroller of the Currency is being on off-balance sheet gizmos known as liquidity puts, which helped all but destroy Citigroup.

Better late than never, I suppose. But Big Bob Rubin has apparently had a change of heart as to the virtues of financial deregulation.

Appearing before the Financial Crisis Inquiry Commission today with former Citigroup CEO Charles Prince in his capacity as former vice chairman of the bailed out bank, Rubin expressed much different sentiments about the need to prevent banks from becoming too big to fail and derivatives from adding untold amounts of undetectable leverage to the financial system than he did when he was President Clinton's deregulator in chief.

Man, I just caught some of the last part of the financial crisis show this afternoon and I have to say it did very little to clarify who the hell was responsible for Citigroup's near-death experience during the mortgage meltdown, even though the panel had four former Citifolks on it.

Citi's ex co-CEO of markets and banking, Thomas Maheras, for example, testified that the bank was well aware that housing was heading south in late 2007 and was actively managing its balance sheet to deal with that.

With Congress expected to debate financial regulatory reform until the cows come home, lots of commentators are weighing in on what it must do to inhibit, if not prevent, an even worse financial meltdown. (And no, we aren't out of the woods, not by a long shot.)

Our own Marine Cole ventured into these waters last week with a piece on to what degree legislation as currently formulated would require bank regulators to toughen their capital reserve requirements. But there's a lot more to say about that, too much.

I see that the slow boat to financial reform continues to drift sideways, as Senate Banking Committee member Bob Corker followed Paul Volcker's call for action yesterday with a sorry-no-can-do.

Unlike health-care reform, Democrats will need the support of a Republican like Corker to get a bill containing resolution authority for big banks, derivatives regulation, and consumer protection enacted this year. Only one piece of legislation can be passed through the budget reconciliation process in any one year, and now that the process was used for health-care reform, everything else will require a filibuster-proof majority that the Democrats no longer have.

Two stories today say it all about the status of the economic recovery: Wall Street's doing fine, so who cares about Main Street?

Or at least that's the way the world seems to appear based on Bloomberg's reporting.

I see Bloomberg can't resist interviewing Alan Greenspan about the perils of federal budget deficits, because the former Maestro's crystal ball is just so marvelously clear that he accurately predicted the housing crisis, which he did nothing to create, and took majorly serious steps to forestall it.

Oh, none of that last clause is true? And the ex-Fedster went so far as offer the markets the "Greenspan put," which is the ultimate "too big to fail" deal when you think about it?