If an institution has deposits insured by the federal government, it should not be involved in trading risky derivatives. Of course, what investors do with their own money is their own business…. But what banks do with money insured by the taxpayers is another matter entirely.
--
Byron Dorgan, 1994

One of the first to sound the alarm bells about murky financial instruments that would ultimately blow up our economy in 2007, Senator Byron Dorgan noted back in 1994 about the dangers that unregulated derivatives pose to the economy. He also observed that it's unfair for banks whose deposits are insured by the FDIC to speculate in risky derivatives. Today, banks can still support their derivatives trading desks with FDIC-insured capital.

That could all change in a few weeks. A key part of the Senate financial reform bill known as section 716 would stop banks from using FDIC-insured deposits to run their swaps trading desks. Banks could continue to trade derivatives, but they'd have to do so with their own capital, in separate subsidiaries.

Wall Street is complaining that doing so would hurt profits for Goldman Sachs (NYSE: GS), JPMorgan (NYSE: JPM), Wells Fargo (NYSE: WFC), Citigroup (NYSE: C), Morgan Stanley (NYSE: MS), and Bank of America (NYSE: BAC). Together, these banks control more than 95% of the derivatives market, no matter how you slice it. Others have argued that derivatives trading is a part of the normal banking relationship between banks and their customers, and that removing the subsidy could make derivatives more expensive.

What do you think?

For more on how Section 716 would reshape the banking industry, check out "The End Game for Wall Street."

Fool editor Ilan Moscovitz doesn’t own shares of any company mentioned. The Motley Fool is investors writing for investors.