Unregulated derivatives are holes in our economic boat (Sen. Maria Cantwell)

If your boat had twelve holes in the bottom, you wouldn’t fix eleven of them, congratulate yourself on a job well done and take it out to sea.

Any loopholes in proposed regulatory reform for the derivatives market work much the same way. In derivatives markets, as in boating, one hole can sink the entire vessel.

That’s why it is so important that Congress respond to the derivatives market meltdown with a thorough, leak-proof, loophole-free regulatory reform bill. Last year, we saw how much damage loopholes can cause. The economic collapse in 2008 stemmed in large part from banks recklessly gambling in the unregulated derivatives market. When the bottom fell out, the banks tapped taxpayer dollars to avert disaster. Now they are using the bailout money to place more bets in a derivatives market that remains unregulated.

Until 2000, as a matter of federal law, all derivatives were required to be traded on regulated central exchanges overseen by the Commodity Futures Trading Commission, unless specifically exempted by the Commission. The oversight protected the public from the chaos that could result from unscrupulous or reckless trading.

Then in 2000, Congress passed a provision in the Commodities Futures Modernization Act of 2000 that exempts derivatives trade from federal regulation. At the same time, Congress also preempted state gambling regulations, the point being to strip away all regulatory control – federal or state – over derivatives trading.

When federal regulators are stripped of their ability to oversee dangerous derivatives trades, states should not be blocked from protecting their citizens. I have introduced legislation to empower state gambling regulators and attorneys general to examine unregulated derivatives trading and take appropriate action to protect citizens from practices which can harm the foundations of our economy.

But to protect taxpayers from the boom-bust-bailout cycle, we must fight strong Wall Street and corporate lobbying campaigns and pass derivatives reform legislation that contains absolutely no holes.

I applaud Senate Banking Committee Chairman Christopher Dodd for offering strong draft legislation to shed light on the dark derivatives market. It is a constructive beginning of what will likely be an extensive Senate debate – that will also include the Agriculture Committee – over how to strengthen our financial regulatory structure.

Wall Street is spending hundreds of millions of dollars lobbying Congress to protect its financial interests, which might explain why nothing has been repaired in our financial regulatory system. Knowing that public trust of Wall Street is at a low ebb, the big bankers are enlisting some of their clients – big companies that employ thousands of workers in states and districts – to lobby on their behalf.

The big companies may be arguing against their own interests. The unregulated speculation in derivatives has hurt, not helped, big businesses by siphoning money away from productivity and putting it into what amounts to sophisticated gambling. This is the hole in the bottom of our economic ship that we must repair.