On Sunday, Bloomberg News reported on an estimated $13 billion worth of income that banks gained by taking advantage of the Federal Reserve’s below-market interest rates, which were sometimes as low as 0.01 percent.

The six banks that benefited the most from this “subsidy” – Bank of America, Citigroup, Goldman Sachs, JP Morgan, Morgan Stanley, and Wells Fargo – reaped a combined $4.8 billion of estimated extra income from the below-market loans.

It’s worth pointing out that all six of these banks were major political players.

All six have also averaged at least $2.7 million in lobbying a year for the period 2008-2010. And all six have averaged at least $2 million in campaign contributions for the last two electoral cycles. Four of the six banks rank among the top 100 political contributor organizations for the last two cycles. Two of the six were in the top 100 political lobbying organizations for the period 2008-2010. (We focus on 2008-2010 because although the bulk of the lending took place in late 2008 and early 2009, continued lobbying by the banks may have contributed to keeping these deals undisclosed until now.)

 

Bank	Contributions 2007-008 & 2009-2010 (Average Per Cycle)	Lobbying 2008-2010 (Average Per Year)	In-house lobbyists 2008-2010 (Average Per Year)	Firms hired 2008-2010 (Average Per Year)
Bank of America	$3,233,745 (rank: 57)	$4,085,333 (rank: 160)	5.0	7.7
Citigroup	$3,746,536 (rank: 70)	$5,846,666 (rank:37)	9.0	13.7
Goldman Sachs	$5,315,836 (rank: 51)	$3,584,333 (rank: 179)	7.7	14.0
JP Morgan	$4,274,232 (rank: 56)	$6,323,333 (rank: 70)	9.3	12
Morgan Stanley	$3,072,767 (rank: 108)	$2,710,000 (rank: 237)	4.0	4.3
Wells Fargo	$2,000,573 (rank: 126)	$3,518,580 (rank: 197)	3.7	3.3

While it’s difficult to infer causality from these numbers, it is fair to say that these companies were no strangers to Washington. And this probably didn’t hurt them when it came to negotiating bail-out deals with the Federal Reserve and keeping these deals undisclosed.

"The political influence of the financial industry can be a source of systemic risk," is the thrust of an IMF working paper entitled "A Fistful of Dollars: Lobbying and the Financial Crisis." The December 2009 report evaluated "how lobbying may have contributed to the accumulation of risks leading the way to the financial crisis."

Mortgage-lending companies that lobbied prior to the financial crisis generally engaged in riskier lending practices, according to the report, and they were more likely to be bailed out. "Sixteen of the twenty lenders that spent the most on lobbying between 2000 and 2006" received bailout funds, with 60% of funds allocated under TARP going to lenders that lobbied on specific issues.

Without greater disclosure of the activities on which lenders lobbied, the authors could not determine whether mortgage lenders lobbied to gain preferential treatment or to share information with decision-makers. (It could be both.) However, they emphasized that their findings were consistent with a "moral hazard" interpretation, where mortgage lenders engaged in riskier behavior because either they expected to be bailed out in the event of trouble or focused on short-term gains over long-term profits.

The paper concludes that "the prevention of future crises might require weakening political influence of the financial industry or closer monitoring of lobbying activities to understand the incentives behind [financial industry behavior] better."

This week the Obama administration released three different plans to end or vastly shrink the role of the government in the mortgage market through the government sponsored enterprises Fannie Mae and Freddie Mac. One can only imagine these plans being proposed under the current circumstances where the two mortgage giants have had their lobbying and campaign contribution operations suspended by the government after they were taken over in 2008.

Since 1998 Fannie and Freddie combined to spend over $172 million on lobbying in Washington and $16.6 million in campaign contributions to lawmakers and presidential candidates, according to data from the Center for Responsive Politics. These numbers, when combined, would make the duo the seventh biggest spender on lobbying and near the top fifty in campaign contributions over this period.

Repeated attempts to reform Fannie and Freddie were beaten back during this period as Fannie and Freddie poured campaign contributions into the coffers of members of the House Financial Services Committee and other relevant lawmakers while hiring key political figures as board members and lobbyists.

The policies proposed now by both the Obama administration and the House Republicans to end Fannie and Freddie are not just an outgrowth of the financial situation of the two companies that were put into government conservatorship. They are a product of the lack of lobbying from the former mortgage giants along with the total collapse of other mortgage companies like Countrywide Financial.

Last week, Barry Ritholtz questioned why the bailed-out banks were allowed to continue their lobbying and campaign contributions despite their continued survival made possible thanks to the government money injected into and loaned to them from both Treasury and the Federal Reserve. Ritholtz' post makes it clear that the decision on whether or not to eliminate the lobbying operations of bailed out organizations, banks of GSEs, determines the outcome of the ensuing reforms:

When the GSEs were put into conservatorship by Hank Paulson, several steps were immediately effected: The CEOs and much of the senior management were fired. One of the very next steps put into place was a total ban on all political activities, including — most especially — lobbying. Common stockholders were placed last in line for any claims, with preferred shareholders right behind them.

Compare that to the rescues of Citigroup, Bank of America, Merrill Lynch, and the rest of the bankers wrecking crew. The vast majority of senior management and board members who created and oversaw their own implosions are still in place. A report on Corporate Governance by Professor Emma Coleman Jordan of the Georgetown University Law found that 92% of senior bank execs were still working in their same jobs.

But worse of all, at any insolvent banking institution not named Fannie or Freddie,  none of the POLITICAL ACTIVITIES, CAMPAIGN DONATIONS OR LOBBYING ACTIVITIES were halted. It was business as usual on capital hill, for the bankrupt banks and their highly paid shills.

When we look at the shortcomings of Dodd-Frank, or the weaknesses of the FCIC (Underfunded, short on time, lacking prosecutorial zeal), it traces back to this decision.

Thomas Hoenig, the president of the Federal Reserve Bank of Kansas City, recently penned an op-ed in the New York Times questioning how the biggest financial firms that survived the financial crisis had grown 20 percent larger than they were prior. How could Washington, in its financial reforms, allow too big to fail to continue?

Hoenig answered this himself:

How is it possible that post-crisis legislation leaves large financial institutions still in control of our country’s economic destiny? One answer is that they have even greater political influence than they had before the crisis. During the past decade, the four largest financial firms spent tens of millions of dollars on lobbying. A member of Congress from the Midwest reluctantly confirmed for me that any candidate who runs for national office must go to New York City, home of the big banks, to raise money.

There is no bigger contributor to political campaigns than the financial sector. Since 1999 the financial sector has contributed more than $1.8 billion to federal candidates for election. As Hoenig notes, much of that sector is located in New York City.

Overall, over the past six election cycles, New York state residents employed in the finance, insurance and real estate sector have sent more than $50 million to congressional candidates running for office in a state other than New York, according to data from the Center for Responsive Politics. This is a crucial source of money for congressional candidates, particularly those in high-cost Senate races. (The animated map linked in the image below shows where those contributions went over time.)

Out of state Democrats accounted for over half of the money contributed by individuals in the New York State financial sector. Democrats received over $30 million to the slightly more than $16 million received by Republicans. The Independent candidacy of Connecticut Sen. Joe Lieberman pulled in more than $11 million.

The Sunlight Foundation's Party Time database of political fundraisers shows a total of 37 fundraisers held in New York City for congressmen and senators who do not represent New York State. (These numbers are incomplete and the number of fundraisers is almost certainly higher.)

There are 12 fundraisers listed in 2010, including a recent one for Rep. Charlie Dent (R-PA). In October Rep.-elect Mike Fizpatrick (R-PA) held a fundraiser with incoming Financial Services Committee chairman Spencer Bachus (R-AL). (Bachus raised nearly 63% of his 2010 contributions from the finance sector.) Other fundraisers are for lawmakers from California, Oklahoma, Kentucky and various other states spanning the country. (View all 37 of these Party Time fundraisers here.)

Hoenig's example of fundraising in New York is just one anecdote in the larger story of the financial sector's influence in Washington. Since the 1998 election cycle the finance sector has spent nearly $2 billion on campaign contributions to federal political candidates. Over the same period of time the sector has spent more than $4.2 billion on lobbying in Washington.

This leads to a total of more than $6.2 billion spent by the finance sector over a thirteen year period to influence outcomes in Washington. The finance sector has spent almost $1 billion more than any other economic sector on federal campaign contributions and lobbying combined. (The motion chart on the right shows the accumulation of contributions and lobbying over time. The green dot is the finance, insurance and real estate sector.)

Former IMF economist Simon Johnson in an article for The Atlantic last year explained that Wall Street "gained political power by amassing a kind of cultural capital--a belief system." People in Washington believed that those in Wall Street knew what they were doing and believed that the accumulation of wealth in the financial sector was a national good, Johnson argues.

That belief system was aided by the $6.2 billion investment that Wall Street made in Washington. The sector invested in staffing agencies and congressional committees and in financing the increasingly costly campaigns. Those investments were then cashed out as staffers and lawmakers flocked to lobbying firms and cushy Wall Street gigs.

The New York Times wrote in April that “more than 125 former Congressional aides and lawmakers are now working for financial firms as part of a multibillion-dollar effort to shape, and often scale back, federal regulatory power, data shows.” These included former Rep. Michael Oxley, the most recent former chairman of the Financial Services Committee, and former Rep. Richard Baker, who previously chaired the Financial Services Subcommittee on Capital Markets.

Other powerful former lawmakers recently registered to lobby for the financial sector include Senate Majority Leaders Trent Lott and Bob Dole, House Majority Leaders Dick Gephardt and Dick Armey and Speaker of the House Dennis Hastert.

The particular target of Hoenig's ire in his above quoted NYT op-ed is the 1999 passage of the Gramm-Leach-Bliley Act, which tore down the wall between investment and commercial banking. The bill was named after its three main cosponsors: Sen. Phil Gramm, Rep. Jim Leach and Rep. Thomas Bliley. Since retiring from Congress, Gramm went on to become the president of the Swiss bank UBS AG and Bliley works as a registered lobbyist, often for financial interests. (Leach serves under President Obama as the Chairman of the National Endowment for the Humanities.)

Now, recently departed Office of Management and Budget head Peter Orszag is jumping ship to Wall Street. Orszag, following in the footsteps of former Treasury Secretary Bob Rubin, is slated to join Citigroup as a high level executive with a multimillion dollar salary. Recently, President Obama's counsel Greg Craig left the White House and joined Goldman Sachs. It is unclear if either of them will register as a lobbyist.

Even without Orszag and Craig registering to lobby, the industry has more than enough clout. The Center Responsive Politics reports 1,390 former government employees working as lobbyists for the financial sector.

Another prime spot for investment by the financial sector has been the House Financial Services Committee.

The majority party in the House of Representatives often puts favored freshmen and sophomore lawmakers on the House Financial Services Committee, the committee that oversees the financial sector, so that they can raise piles of money from Wall Street.

The Huffington Post's Ryan Grim and Arthur Delaney explained how this worked under the outgoing Democratic majority:

The banking committee is the second-largest in Congress -- the Transportation and Infrastructure Committee has three more members -- and is known as a "money committee" because joining it makes fundraising, especially from donors with financial interests litigated by the panel, significantly easier. The Democratic leadership chose to embrace this concept, setting up the committee as an ATM for vulnerable rookies. Eleven freshman representatives from conservative-leaning districts, designated as "frontline" members, have been given precious spots on the committee. They have individually raised an average of $1.09 million for their 2010 campaigns, according to the Center for Responsive Politics; by contrast, the average House member has raised less than half of that amount.

Meanwhile lawmakers and staffers keep cycling in between the financial sector and Washington. Delaney and Grim showed that, as of the end of 2009, “almost half of the 126 people who [left the Financial Services Committee] registered as lobbyists, mostly for the financial services industry.” Also, “[s]ixteen of the committee's 86 current staffers -- including a good chunk of the senior staff -- worked as lobbyists before coming to the committee.”

The committee will soon be headed by a lawmaker, Rep. Spencer Bachus, who received nearly 63 percent of his campaign and political action committee contributions from the finance sector. Bachus recently stated his philosophy for governing the committee, "In Washington, the view is that the banks are to be regulated, and my view is that Washington and the regulators are there to serve the banks."

The freshmen congressmen appointed to the committee include the largest recipient of finance sector contributions among freshmen and a former bank lobbyist.

Meanwhile, the Senate Banking Committee is set to be chaired by Sen. Tim Johnson, whose state of South Dakota is home to the credit card industry. Johnson recently hired Dwight Fettig, a lobbyist for the American Bankers Association, JPMorgan Chase and Freddie Mac, as a senior adviser. Fettig will likely become the next staff director for the Banking Committee.

The entirety of this enterprise—the doling out of campaign contributions, revolving in between the public and private sector, spending money to influence policy-makers—is entirely legal. That system, however legal it is, is structurally unjust and unsound. As James Fallows notes in a post bemoaning Orszag's revolving door spin, "When we notice similar patterns in other countries -- for instance, how many offspring and in-laws of senior Chinese Communist officials have become very, very rich -- we are quick to draw conclusions about structural injustices."

The intense amount of organized money and human capital has succeeded in making Washington captive to the financial sector. All of this at a low cost when compared to the soaring profits they enjoyed at the height of the boom and the trillions of dollars in aid they received when the bottom fell out.

Ultimately, the $6 billion investment in Washington was the least risky one that the financial sector made over the past twelve years. The firms that survived the storm are bigger than ever and ready to spend billions more to keep their investment afloat.

Last week Sen. Tim Johnson, the incoming chairman of the Senate Banking Committee, hired Dwight Fettig, a lobbyist with numerous financial sector clients, as a "senior adviser" and it is rumored that he will become the committee's staff director. Fettig, who is a partner at Porterfield, Lowenthal & Fettig, previously worked for Johnson as a legislative director from 1996-2003.

Fettig's most recent clients include financial heavy hitters such as the American Bankers Association, JPMorgan Chase and the National Association of Mortgage Bankers.

Prior to joining up with Porterfield and Lowenthal, both of whom are former Senate Banking Committee staffers turned lobbyists, Fettig was the chief lobbyist for Freddie Mac.

It is no surprise that Sen. Johnson would hire a financial industry lobbyist to head the Banking Committee. Johnson has long been one of the most friendly Democrats to the financial industry. This largely stems from his home state of South Dakota being the home of the credit card industry.

From 2005-2010 Johnson's campaign and political action committees raised a combined $1,763,325 from the finance, insurance and real estate sector, according to the Center for Responsive Politics. That accounted for approximately one-quarter of all contributions made to Johnson during that time.

Johnson's political action committee, South Dakota First, which doles out money to Senate candidates, is almost entirely dependent on financial sector money. South Dakota First raised 75 percent of its contributions from the finance sector in 2009-2010, according to data collected from TransparencyData.com.

When the Senate considered a bill to reign in credit card abuses last year Johnson was the only Democrat to oppose it. In a 2009 blog post Open Congress' Donny Shaw looked at Johnson's voting history on credit card issues.

While Fettig is rejoining Johnson in the Senate another former Johnson staffer will remain in the private sector as a lobbyist. Naomi Camper left Johnson's office in 2005 to become co-head of Federal Government Relations at JPMorgan Chase, one the biggest banks in the United States.

Tomorrow, the Federal Reserve is supposed to release information regarding a suite of programs created to increase lending during height of the financial crisis.  Scheduled for release are the amounts, dates, types of loans and loan terms for every entity that took advantage of the emergency lending programs set up by the Fed. Included in that list will be the Term Asset-Backed Securities Loan Facility (TALF), the mortgage backed securities program, Maiden Lane and other programs that provided loans or assistance to financial institutions between December 1, 2007 and July 21, 2010 – the date the Dodd-Frank Wall Street Reform and Consumer Protection Act was put into law.

This information is of interest for a few reasons. If it’s fulfilled as the Dodd-Frank bill requires, we’ll know which banks had to use the secondary credit window, also known as the discount window, which was reserved for banks in poorer health. Information about TALF loans will show us which banks took advantage of federally guaranteed loans as an incentive to buy “toxic assets” and which banks were able to get rid of their bad assets as a result of the program. We’ll also find out which banks the Fed was nice enough to buy so many risky mortgage-backed securities from.

The graphic below shows when spikes in purchases occurred. It visualizes the Fed's growth over time as it took on more and more risk to help the economy.

[caption id="attachment_18716" align="aligncenter" width="580" caption="http://subsidyscope.org/bailout/federal-reserve/"][/caption]

It seems as though the requirement inserted into the Dodd-Frank bill will satisfy the Freedom of Information act request filed by Bloomberg back in 2008. Bloomberg and many other news outlets and government watchdogs, including the Sunlight Foundation, wanted to know details about the collateral being pledged to the Fed in exchange for loans to help banks remain liquid. That FOIA was denied claiming the information was confidential commercial information and therefore did not have to be released.

The Fed claimed that releasing the information could have the effect of stigmatizing the struggling banks, thus hurting them even more. The data that is supposed to be released now, however, will be as much as two years old in some cases. Therefore the current state of banks that might have once been in trouble will still be unknown.

To learn more about the Fed's steps to help the economy and how it strayed from its primary job of setting the interest rate, read here.

Here is the text from the Dodd-Frank bill as enacted:

"PUBLICATION OF BOARD ACTIONS.—Notwithstanding any other provision of law, the Board of Governors shall publish on its website, not later than December 1, 2010, with respect to all loans and other financial assistance provided during the period beginning on December 1, 2007 and ending on the date of enactment of this Act under the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Term Asset-Backed Securities Loan Facility, the Primary Dealer Credit Facility, the Commercial Paper Funding Facility, the Term Securities Lending Facility, the Term Auction Facility, Maiden Lane, Maiden Lane II, Maiden Lane III, the agency Mortgage-Backed Securities program, foreign currency liquidity swap lines, and any other program created as a result of section 13(3) of the Federal Reserve Act (as so designated by this title)— (1) the identity of each business, individual, entity, or foreign central bank to which the Board of Governors or a Federal reserve bank has provided such assistance; (2) the type of financial assistance provided to that business, individual, entity, or foreign central bank; (3) the value or amount of that financial assistance; (4) the date on which the financial assistance was provided; (5) the specific terms of any repayment expected, including the repayment time period, interest charges, collateral, limitations on executive compensation or dividends, and other material terms; and (6) the specific rationale for each such facility or program."

The House Ethics Committee announced three charges against Rep. Maxine Waters today. The Statement of Alleged Violations charges Waters with failing to "reflect creditably on the House," violating a rule banning the receipt of compensation through use of Congressional influence and accepting "favors or benefits" for herself and her family.

The committee provides all of the documents here.

[caption id="attachment_14073" align="aligncenter" width="580" caption="Derivatives trading as featured in the 1983 movie "Trading Places.""][/caption]

The final piece of the financial regulatory reform puzzle is about to come into place as Sen. Blanche Lincoln released language last Friday that would impose rules on the unregulated world of over-the-counter derivatives trading. Lincoln's bill, the Wall Street Transparency and Accountability Act, is more far reaching than proposals from both the Obama administration and the House of Representatives. This comes as somewhat of a surprise from the moderate and previously bank-friendly senator who has benefited from finance industry contributions in her post as chair of the Senate Agriculture Committee.

The Agriculture Committee occupies a unique place in the oversight of the nation's financial markets. With legislative jurisdiction over the Commodity Futures Trading Commission (CFTC)--historically futures trading began as a trading mechanism for farmers--the committee maintains jurisdiction over futures and derivatives trading. This unique arrangement provides committee members the ability to pull campaign contributions from the most prolific giver of contributions, the financial sector.

What are derivatives?

Examples from the financial meltdown

How did some derivatives escape regulation?

In 2009, Lincoln raised $693,500 from the finance, insurance and real estate sector, according to data obtained from the Center for Responsive Politics. Those with a specific stake in derivatives reform did not begin contributing to her campaign until she ascended to the chairmanship of the committee after the death of Sen. Edward Kennedy caused a a shuffling of committee seats. Since ascending to the Agriculture Committee chair Lincoln raised $256,900 from the finance, insurance and real estate sector. She also raised over $44,000 from financial companies with a major stake in derivatives reform--almost twice as much as she raised in the previous eight months from similar companies.

In total these major derivatives players contributed approximately $70,000 to Lincoln's reelection campaign. These companies include fifteen members of the International Swaps and Derivatives Association (ISDA), an international trade association that writes the rules for derivatives trading that remains unregulated. Some of these contributors include  JPMorgan Chase, Goldman Sachs, Bank of America, Credit Suisse, Deutsche Bank and UBS.

Despite all of the money and lobbying power—Credit Suisse employs Lincoln's former chief of staff as a lobbyist—expended to deflect new regulations, Lincoln has unveiled unexpectedly tough regulations. (Click here to see Lincoln's reforms.) While these tougher rules will set up a fight in the Senate, they will assuredly create a massive industry showdown if they pass the Senate and move to conference with the House to reconcile the two bills.

Finance influence in the House

Unlike Lincoln's bill, which goes against the wishes of her financial sector fundraisers, the House bill is a reflection of the finance sector's enduring influence in Washington. Throughout the process, the derivatives section of the House bill was consistently amended in favor to the finance industry as efforts to toughen the bill were defeated.

The Obama administration has argued that the majority of over-the-counter derivatives be traded out in the open on exchanges or cleared through clearinghouses. The banks and others have argued for broad exemptions for which over-the-counter derivatives would be required to be traded in the open. The House bill, however, wound up riddled with exemptions.

The bill began under the control of Rep. Barney Frank, the chairman of the House Financial Services Committee. The Financial Services Committee is a cherished post for congressmen to raise money and for staffers to gain knowledge for a future lobbying job. Since 2000, nearly half of the 126 committee staff who left the committee became lobbyists, according to a report by The Huffington Post. The committee is also the chief conduit for financial sector campaign contributions with the 71 committee members, or 16% of the 435 member body of Congress, accounting for 33% of all financial sector campaign contributions to members of the House in 2009.

In October 2009, Bloomberg reported on the crucial role that members of the New Democrat caucus played in helping add exemptions and loosening regulations on over-the-counter derivatives. Many of these members, along with their ideological counterparts, the Blue Dog Democrats, received inordinate amounts of campaign contributions from the financial sector.

Financial Services Committee member Gregory Meeks pulled in over 50% of his 2009 campaign contributions from the financial sector. Rep. Melissa Bean, another committee New Dem, raked in over 47% of her contributions from the financial sector, as did Rep. Dennis Moore. Committee members Jime Himes and David Scott pulled in over 30% of their campaign haul from finance companies and Rep. Charlie Wilson and Ron Klein pulled in over 25% of their total contributions from finance.

A major point of contention is what kinds of exemptions should exist for the over-the-counter derivatives that will be pushed onto exchanges and into clearinghouses. Both the Financial Services Committee and the House Agriculture Committee carved out large exemptions for “end-users”--a wide-swath of companies that may include mutual funds, insurance companies, hedge funds and private-equity capital. The exemptions also aid the top five banks in the United States—Citi, JPMorgan Chase, Bank of America, Morgan Stanley and Goldman Sachs—which hold approximately 95% of the over-the-counter derivatives exposure among the top 25 banks, according to the Comptroller of the Currency.

CFTC Chairman Gary Gensler, speaking on behalf of the Obama administration, declared the exemptions in the House bill unacceptable, adding, “we should ensure that every transaction between Wall Street banks and their financial customers, such as hedge funds, insurance companies or leasing companies, be subject to a clearing requirement.”

The loosening of the derivatives language continued when the bill hit the floor. An amendment widening the “end-user” exemption offered by Rep. Scott Murphy, a recipient of $525,015 in campaign contributions from the financial sector in 2009, passed by a wide margin with 131 Democrats in support—87 of them were New Dems or Blue Dogs. The House also voted down three amendments that would have placed tougher regulations on derivatives trading. The regulations that would have been imposed by these three defeated amendments mirror regulations proposed by Sen. Lincoln in her derivatives reform bill.

A lot of industry players came away from the House debate moderately contented. The coming showdown between the House and Senate over derivatives will reignite their engines and push them to pressure their allies in the House. One industry, specifically one company, will emerge from this debate with a windfall in profits, no matter which version of the bill passes.

Clearing and exchange trading requirements

Intercontinental Exchange, Inc. (ICE) operates derivatives exchanges and owns the biggest over-the-counter derivatives clearinghouses in the country. (See here for an explanation of exchanges and clearinghouses.) Both the House bill and Lincoln's bill would increase the number and type of derivatives that would be required to be cleared by a clearinghouse like the one ICE operates. The House bill has a series of exemptions and loopholes governing clearing and reporting, while the Lincoln proposal contains a strict requirement for clearing. Either way, this will pump up ICE's bottom line. It also would be a boon for the big banks as well.

In 2008, ICE purchased The Clearing Corporation, an over-the-counter derivatives clearinghouse from its owners. The owners included a who's who of major banks including JPMorgan Chase, Goldman Sachs, Bank of America, Citi and Morgan Stanley. ICE turned The Clearing Corporation into ICE Trust, which in March of 2009 became the first clearinghouse approved by the Securities and Exchange Commission (SEC) to begin clearing over-the-counter derivatives. If over-the-counter derivatives have to go onto an exchange, there is little option outside of ICE Trust.

When ICE purchased The Clearing Corporation they entered into a detailed profit sharing agreement with their partners, the big banks. The banks and ICE have a 50-50 profit sharing agreement for all profits that come from trades that are cleared by ICE Trust. As previously mentioned, these big banks account for over 90% of the over-the-counter derivatives market. A requirement, especially with a series of exemptions that the banks can take advantage of themselves, would increase profits for both ICE and the big banks. In the nine months that ICE Trust was open for business it processed $3.1 billion in trades and received $30 million in fees.

In testimony before Sen. Lincoln's committee in December, ICE general counsel Johnathan Short stated ICE's support for an increase in transparency in the market, but also voiced opposition to a requirement that all over-the-counter derivatives trades be cleared or be made over an exchange, much in line with the position of the big banks.

The big banks have an incentive to create as many exemptions in the clearing and exchange trading requirement as possible.This may seem counter-intuitive as ICE would benefit handsomely if all trades had to be processed by their clearinghouse for a fee. But it would not benefit the big banks who are partners with ICE in ICE Trust. The big banks have an incentive to create as many exemptions in the clearing and exchange trading requirement as possible. Previously, if an airline or a manufacturer wanted to purchase a derivatives contract they had to do it through a big bank, as the big banks had good credit ratings and were seen as a safe place to make these trades. This allowed the big banks to charge both the user and the trader fees for making the contract. If all derivatives contracts are required to be traded on exchanges or cleared then the users and traders could simply make contracts with each other rather than relying on a bank as a go-between. With a wide-range of exemptions to clearing and exchange trading, derivatives contracts could still be made within the big banks and then contracts made by big banks could cleared through a clearinghouse like ICE Trust.

Over the past three years, ICE increased its lobbying operation in Washington. Last year, ICE spent nearly $700,000 to lobby Congress and the executive branch. In their pursuit of lobbying talent, ICE poached a top member of the House Financial Services Committee staff, Peter Roberson. ICE picked well. Roberson had a hand in crafting the House bill's derivatives language, including its many exemptions. Roberson's job switch infuriated his former boss Barney Frank, who subsequently banned committee staff from talking to Roberson while he remains chairman of the committee.

ICE's campaign contributions increased as well. Sen. Lincoln was the recipient of $12,300 in campaign contributions from ICE's employees and political action committee. The only member of Congress to receive more in 2009 is Banking Committee Chairman Chris Dodd, who is no longer running for reelection.