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Originally published Thursday, March 18, 2010 at 4:52 PM

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Lance Dickie / Seattle Times editorial columnist

Dodd's financial-salvage mission

A lengthy regulation bill drafted by Sen. Christopher Dodd, D-Conn., begins the trek toward restoring confidence in the U.S. financial system, at home and abroad.

Seattle Times editorial columnist

After 19 months of pain and suffering in the U.S. economy, with horrific job losses and evaporating 401(k) balances, one does not expect the proposed fixes to be so disturbing.

The problem is not the particular remedies in Sen. Christopher Dodd's financial-regulation bill, it is the alarming recognition of how perilous conditions were and still are.

The to-do list of the Connecticut Democrat, who chairs the Senate Banking Committee, is borderline terrifying. A reminder no one has been paying attention for years. Things done and left undone; sins of omission and commission.

Ordinary, work-a-day citizens of every political stripe never had a clue, and never had a chance.

American taxpayers paid out hundreds of billions of dollars to salvage a financial system that was totally stacked against them. Even that is not quite right. They were irrelevant beyond the exploitable grist and fodder they represented.

Dodd's almost 1,400 pages of legislation seek to impose control where most taxpayers rightly assumed someone was already providing some basic level of oversight. Banks turned into casinos using taxpayer-backed deposits, and rating agencies expected to cast judgment on the credit worthiness of investments and institutions turned into fee whores.

Dodd's next herculean task is to muck out the financial stables that operated completely out of view. Federal regulators and Congress were either co-conspirators in creating loopholes for unscrupulous traders — think Enron thugs — or they avoided any oversight. Think derivatives and credit-default swaps.

The latter is a raw bet that something bad will happen to someone else. Swaps might be likened to insurance, but the bettor has nothing personally at stake.

No one seems to truly grasp how they work or the rules for trading them, but they exist in stupefying quantities akin to numbers in astronomy.

A story in The Seattle Times' business section last Friday had Commodity Futures Trading Chairman Gary Gensler calling for all derivatives to be transparently traded. Gensler decried attempts by Wall Street to win exemptions that would obscure half the trades in the $600 trillion market for derivatives. Credit-default swaps account for $60 trillion of that amount.

Wall Street had a contrived device in credit-default swaps that allowed it to bet that a whole lot of crappy mortgage loans would go bad. Millions of homes in foreclosure? Gimme a high-five and pass a flute of Cristal.

The volume of howling by the broad, shrill chorus of the U.S. financial community is the audio benchmark that Dodd is on the right track.

Remember, these shrieking free-market frauds were bailed out by U.S. taxpayers, saved from collapse and then counted the infusions of federal cash as part of a market rebound that should be included in calculations of customary annual bonuses.

Dodd's schematic for restoring financial stability is as daunting as the equally desirable and necessary health-care reforms up for a vote. He would create a Consumer Protection Agency, ferret out systemic risks that undermine economic stability, require capital and leverage requirements that end too big to fail, centralize federal bank regulation, close the most glaring investment loopholes, create transparency and protections for private investors and enforce laws already on the books. And that is a partial list.

Fundamental confidence in the U.S. economy is at stake. Dodd's salvage mission is that basic.

Lance Dickie's column appears regularly on editorial pages of The Times. His e-mail address is ldickie@seattletimes.com.

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