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The House Financial Services Committee just approved rules on financial regulatory reform governing derivatives, the often-unregulated, high-risk gambling market that basically accelerated the crash of the global financial system. The Committee approved the measure on a party-line vote of 43-26.
New rules for the largely unpoliced, $450-trillion over-the-counter derivatives market were approved by a key congressional committee on Thursday in a win for the Obama administration.
The House of Representatives Financial Services Committee voted largely on party lines in favor of the rules after months of intense lobbying by major banks and corporations to shape legislation proposed by the administration and modified in recent days during House debate.
Large exemptions to these new rules on derivatives appeared sometime between the Obama Administration’s original white paper and the legislative language shortly thereafter. On a conference call for Americans for Financial Reform, a coalition of over 200 groups working to preserve real reform of the system, Univ. of Maryland professor and former Commodity Futures Trading Commission official Michael Greenberger said that the two major exemptions included:
1) any derivative traded on foreign exchanges, and
2) any trading with a “counterparty not a member of a clearing facility,” i.e. any member of a non-bank.
The Administration’s own head of the CFTC, Gary Gensler, said that these provisions would “swallow the whole” of derivative reform, the exemptions being so broad that they would ensure that the rules wouldn’t cover the majority of trades. Harold Meyerson has more on the faulty nature of this regulation. However, Barney Frank moved yesterday to tighten up those exemptions.
Administration officials had criticized Frank’s original proposal at a hearing of the panel Oct. 7. That version “could unintentionally preserve existing regulatory gaps,” Henry T.C Hu, director of the Securities and Exchange Commission’s division of risk, strategy and financial innovation, said in testimony.
Gary Gensler, chairman of the Commodity Futures Trading Commission, called the loophole an “unintended consequence” that could exclude from oversight all hedge funds as well as large derivatives users such as mortgage-finance companies Fannie Mae and Freddie Mac.
The House panel responded by passing an amendment yesterday redefining “major swap participants.” Derivatives users large enough to “expose counterparties to significant credit losses,” such as Fannie Mae and Freddie Mac, would meet Frank’s revised definition and wouldn’t be eligible for an exemption.
The latest plan still excludes from new rules most “end- users,” corporations that use derivatives to mitigate their operational risks, such as a rise in oil prices or fluctuations in currency rates.
While these regulations are improved, they don’t totally rein in the derivatives market, as the definition of “end-user” could be meant to encompass all kinds of firms.
This is part of an unnerving pattern, where the banks who “own the place” – and pay a handsome sum in lobbying money for their purchase – use their clout to stop the Congress from enacting meaningful reform. Just this week, the Administration shelved a plan for corporate tax reform after howls of opposition from business and the liars over at the Chamber of Commerce (they have 300,000 members, not the 3 million they tout, not that anybody but Mother Jones bothered to look). And as Masaccio has said, New Democrats are trying to put a pre-emption clause to gut the power of the Consumer Financial Protection Agency. Meanwhile the same banks are poised to rake in record pay this year.
Today’s action is decent, but certainly bears watching as it goes through the meat grinder of Congress.
…Americans for Financial Reform, a coalition of over 200 consumer groups, released this statement:
While we appreciate the work Chairman Frank is doing to bring financial reform legislation to the floor, Americans for Financial Reform, and our 200 coalition members, support opening up the derivatives markets with exchanges and insisting on tough prohibitions against fraud, manipulation, and excessive speculation. The draft and proposed amendments do not meet the necessary standards of transparency and accountability. It does not do enough to protect taxpayers and our economy.
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Thanks and congrats on your new gig. The old one in Santa Monica will never be the same.
Yup. Goldman’s bonus pool this year is a billion dollars and counting, the government subsidized losses dumped into last December’s partial (one month) fiscal year notwithstanding.
To me, that demonstrates that Congress’ interest in reform is about as deep as Rahma & Obahma’s and that
Goldman’sthe Treasury’s decision to let Lehman Bros. die was helpful only in further consolidating Goldman’s dominance of Wall Street and DC. Which means that whatever we get from the current health insurance reform legislation is the best we’ll see for some time.They seem to be trying to find a way to make banks’ trading book of derivatives subject to margin and capital requirements while exempting those derivatives on the books of large businesses as ‘hedges’. The math of this is weird though, an offsetting hedge should properly be run through the balance sheet and not held outside it.
My suspicion is many interest rate swaps are arranged between various legal entities of the same corporation to tax dodge and venue shop for regulatory advantage. Big bankers make huge fees arranging these trades and want to protect the revenue stream and insider connections with top financial execs at multi-national companies.
Pretty dirty business in general. Thanks for the interesting article.
It is precisely the exceptions and exemptions which produced the system we have now. I see this only as window dressing, window dressing owned and controlled by the banks. This does nothing to rein in derivatives or the risks associated with them. And what seriously is the AFM on? Frank is a major villain in this.
Any links to any committee hearings, testimony or findings relating to the bill? I tried Thomas and struck out, but maybe I am just bad at it.
Can anyone explain to me why we don’t just save ourselves heartburn and rename the nation: ‘The United Territories of Goldman Sachs’?
And let’s just cut to the chase and put Jamie Dimon, Hank Paulson, and Stephen Friedman on our currency. It would be more honest than what we pass around today, and then we’d no longer be insulting the memories of Franklin, Jefferson, Washington and Lincoln by pretending that we actually hold to their ideals.
The IRS is outgunned too. The Schering/Plough tax dodge decision in the last month relates to facts back in the early 1990s; trading of derivative instruments to offset tax bill. I believe Merrill/Lynch put that one together.
David ,don’t forget this:
the CMM reports that the House Financial Services Cmte. votes out a ‘reform’ package that allows the same sort of crap to go on that got us into this place to begin with.
“Two little-noticed amendments inserted Wednesday into legislation seeking to strengthen regulation of derivatives will allow private industry to continue to set rules and largely self-regulate, tying the hands of regulators who want more say in how these exotic financial instruments are traded.
And when Barney Franks states “A spokesman for Frank said the issues the provisions addressed should be handled by the agriculture committee, and that Biggert’s amendments “were accepted to move the debate along.”, you can see the handwriting on the wall.
To me a ‘bright spot’ is Greenspan saying “U.S. regulators should consider breaking up large financial institutions considered “too big to fail,” former Federal Reserve Chairman Alan Greenspan said.”
As said here, “You know we’ve reached code red “Outrageous” when even “hands off” Alan Greenspan believes the top banks have become too large.”
RoTL, the answer to “Can anyone explain to me why we don’t just save ourselves heartburn and rename the nation: ‘The United Territories of Goldman Sachs’?” is that to do so would completely spoil the illusion of a representative democracy and lead to a revolution whereby Goldman Sachs personnel are either tarred and feathered or taken out and hanged.
Yes, I linked to the HuffPo report in my roundup.
Correction: Schering-Plough was interest rate swap of instruments not derivatives swap. Still likely that IRS is outgunned.