by Michael Collins

It’s all in the family! Senator Chris Dodd writes a financial reform bill but forgets to regulate derivatives, “financial weapons of mass destruction.” Then we find out that his wife works for the owners of two exchanges that will very likely benefit from Dodd's “reform” legislation.

They make the rules. They take the money, all of it, and leave us with debt. And they tell us it’s all legal.

Here’s the story.

March 19, Los Angeles Times by Nathaniel Popper

In the middle of a blog item about credit default swaps, Felix Salmon of Reuters drops the following nugget about Sen. Chris Dodd and the CME Group, which owns the Chicago Mercantile Exchange and the New York Mercantile Exchange.

"Dodd’s wife, Jackie Clegg, is a director of the CME, which paid her $153,219 in 2009; she also owns shares in the company worth about $235,000. (The CME makes no mention of her husband on its website or in its SEC filings, despite the fact that he’s surely a big part of the reason why she has the position.)"

Why is this notable?

Why? Because the Senator, who is supposed to represent the people, left out a big piece of necessary financial reform. He forgot the tight regulation or out right banning of derivatives - a form of gambling illegal in the stock market for nearly 100 years before Congress brought it back to life.

Look what Warren Buffet says about derivatives in the press in 2003 and his 2002 annual report.

Buffeett Warns on Financial 'Time Bomb' BBC, March 4, 2003

The rapidly growing trade in derivatives poses a "mega-catastrophic risk" for the economy and most shares are still "too expensive", legendary investor Warren Buffett has warned.

But Mr Buffett argues that such highly complex financial instruments are time bombs and "financial weapons of mass destruction" that could harm not only their buyers and sellers, but the whole economic system.

Buffet goes into a little more detial in his 2002 annual report.

//www.fintools.com/docs/Warren%20Buffet%20on%20Derivatives.pdf">Warren Buffett Berkshire Hathaway Annual Report 2002

"Unless derivatives contracts are collateralized or guaranteed, their ultimate value also depends on the creditworthiness of the counter-parties to them. But before a contract is settled, the counter-parties record profits and losses – often huge in amount – in their current earnings statements without so much as a penny changing hands. Reported earnings on derivatives are often wildly overstated. That’s because today’s earnings are in a significant way based on estimates whose inaccuracy may not be exposed for many years."

The fearless financial blogger who hounds Wall Street firms for their shoddy and illegal practices, Felix Salmon, first broke the story. He explains how Dodd, who is retiring this year, feathers the next for his wife's firm.

Is there an alternative to exchange-traded CDS? Felix Salmon Mar 19, 2010

The move to put derivatives on exchanges is something that has widespread support in the House of Representatives and the Obama administration, but what about the connection between Dodd and one of the major beneficiaries of this potential reform?It’s pretty obvious that the exchanges, especially the big ones like the CME Group, would love to see everything consolidated with them. And they’re in luck: that’s exactly what we see in the Dodd bill. I’m sure that makes for happy pillow talk in the Dodd household: Dodd’s wife, Jackie Clegg, is a director of the CME, which paid her $153,219 in 2009; she also owns shares in the company worth about $235,000. (The CME makes no mention of her husband on its website or in its SEC filings, despite the fact that he’s surely a big part of the reason why she has the position.)

So here we are. We've had the greatest economic collapse since the Great Depression. Unemployment is at about 17%. People are losing their houses, retirement, and health care. The prospects are bleak for 300 million citizens. But 10,000 investment bankers got $150 billion in bonuses for the great job they did in 2009.

In the midst of all that, the retiring Senator Dodd writes a bill that continues the Wall Street Casino's favorite game - derivatives like those for subprime mortgages and the much more frightening crisis posed by credit defaults swaps.

Dodd is just carrying on the tradition. Afterall, it was Congress that provided the very legislation in 1999 and 2000 which were the enabling acts for an era of greed.

"The bailout and other efforts to save Wall Street firms and the large banks are essentially an effort to deal with the problems of derivatives and other market failures. Wall Street got the court decisions and legislation it wanted and then promptly proceeded to create today's disaster." Michael Collins, March 14, 2009

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