I’ve said for many months now that Dodd-Frank was not a bill, but a promise to write a bill later. The implementation process lay ahead, and that meant that regulators would have the ability to interpret the will of the Congress. Congress gave them this power very willingly – there are dozens of studies and rulemaking processes called for in the law.
For example, regulators would have to determine the scope of derivatives rules, one of the biggest points of contention. Congress wanted all derivatives to be publicly traded on exchanges or clearinghouses, though at the last minute some exemptions were added to that. Now, Treasury Secretary Timothy Geithner could blow another loophole in the rule by exempting foreign exchange swaps.
The Dodd-Frank bill signed into law in July allows Geithner to decide whether the vast market in foreign-exchange swaps – a type of financial instrument that businesses often use to guard against fluctuations in foreign-exchange rates – should be subject to heightened regulations as other derivatives are.
“It will be very significant,” Karen Shaw Petrou, managing partner at Federal Financial Analytics, said of Geithner’s decision, adding that it will have major implications for the global, multitrillion-dollar foreign-exchange market [...]
Meanwhile, the decision about foreign-exchange swaps, which could come this week, has placed Geithner at the crossroads between big banks, which argue that such deals do not require additional oversight, and some regulators and lawmakers who believe they do.
Big banks claim that foreign exchange swaps played no role in the financial crisis and carried less risks. But this is a disingenuous take – it’s obvious that whatever financial innovation exists in the shadows will be the one used most frequently to maximize risk. So it’s not the type of instrument but how well-regulated it is relative to others that matters. And indications are that Geithner will exempt the foreign exchange swaps, instantly making them more attractive to Wall Street. Geithner is on the record that foreign exchange swaps are “different,” even though he knows well that if you don’t regulate the whole market, the money will move into the shadows. Geithner’s own draft of FinReg exempted the foreign currency market. Gary Gensler, the head of the Commodity Futures Trading Commission, who would have authority over derivatives oversight, wants foreign exchange swaps included in the new rules, but he may not get his wish. And he understands the issue: derivatives traders could simply attach foreign currencies to a standard derivative trade to attain the exemption.
Robert Kuttner gets what amounts to a confirmation from a Treasury Department spokesman on this:
Update: Treasury Deputy Assistant Secretary Steve Adamske, after reading our story, said, “This in no way diminishes our commitment to enforce the rest of Title VII,” [regulating derivatives], in effect confirming that a decision from Geithner to grant the foreign exchange exemption is imminent.
This is basically just a way to keep the casino running. As Sen. Maria Cantwell says:
Sen. Maria Cantwell, one of the most effective advocates for strong derivatives regulation during the Dodd-Frank debates, says, “I can’t believe the first decision the administration would make to carry out Dodd-Frank would be an anti-transparency decision. The idea that the foreign-exchange markets are not at risk is preposterous — we now know that they required multitrillion-dollar bailouts. Anytime you have a lack of transparency, there is potential for abuse.”
The bank lobbyists are pushing hard for this exemption, which should tell you a lot about it. And Geithner appears to be right there with them. I do have to blame Congress for this as well, however. They invested the Treasury Secretary with an extraordinary amount of power under Dodd-Frank. They could have said definitively that all derivatives must be exchange-traded or cleared. They chose to give this escape hatch, allowing Treasury to rework the law without a check. That’s on them.
More from Yves Smith, who thinks that Kuttner is defining the foreign currency market a bit too broadly, but also that Geithner is clearly trying to stifle transparency with this move.





24 Comments


Support this site!
Subscribe to the newsletter
Advertise on Firedoglake
Send
us your tips
Make us your homepage
About FDL News Desk
And this guy is on our payroll, whether we like it or not. Congress is complicit. The White House is jammed with corporatists. Gah!
So, how welcome will these swaps be in foreign exchanges?
It went so well the last time…
The Pukes love it. Why? They can blame even more on Soros. If you remember .. foreign currencies is how Soros made the money that made him famous
Life is just full of surprises.
Not to worry. The banks have learned their lesson. /s
Now that the hearings are over, the tv cameras are pointed elsewhere, and O’Sellout signed this pile of crap into law, the real looting er “regulating” can begin.
methinks they’ve really set up the world for a crash within 5-10 years…
The only thing that will work is outlawing the casino and imprisoning the miscreants. Until then, the band plays on.
I give it two, right before the election.
Geithner! Nuff said!
Geithner also claims that’s a popsicle he’s enjoying.
Prison or a blindfold and a last cigarette or cigar. Let em even have a Cuban.
Kutner says as a result of “extensive lobbying by Geithner and the financial industry, the final law contained a sleeper provision allowing an exemption if the Treasury secretary issues a finding that foreign-exchange derivatives should be exempted in the public interest.”.
I don’t understand why he needed to repeat himself.
Can somebody please put Timmeh Geithner and all of his buddies in prison? Please?
I am sure that I’ll get blasted for this, but how does this differ from the “we will have to pass the bill to see what is in it”, “100+ exemptions and counting” Nationalized Health Care, err Socialized Medicine (no that’s not it, oh yeah) ObamaCare bill? That’s also a sup to industry and a poorly crafted attempt a legislation aimed only at addressing a public seething for “change”.
Re: Yves saying “Dodd Frank, by limiting exchange clearing to “standard” derivatives, has already provided a supertanker-sized loophole. It’s therefore pretty egregious to see that the Treasury Secretary is inclined to enlarge it.”
Seems Yves is a truth teller. And he understands the market (or at least his understanding is the same as the one I had when I was in that market). Assuming the regulation deals with forwards only, it is hard to see how Dodd Frank is weakened.
Of course that is a large assumption – and the perils mentioned may well be in the regulations released.
Geithner was also the man at Treasury in the 1990′s who worked on the FSA portion of the WTO agreement. If I remember correctly, that agreement committed us to repealing Glass Steagall.
So yeah, I don’t expect Geithner to be anything but a cheerleader for our Wall Street Casino’s.
But what’s to be expected of a man who’s spent a good portion of his life working for Kissinger, Peterson and Rubin?
Is Geithner leaving a loophole open for offshore tax cheats????? Looks like it.
I HOPE ALL OF YOU WILL READ THIS:
About six months ago, I was just another random FDL commenter. Since then, more or less as a hobby, I started doing some day trading of derivatives. I did a lot of reading. Then I put looked for a broker. Wow. There are a lot of brokers. I mean a lot of brokers. You look for reviews. Wow. There are a lot of negative reviews. But I eventually settled on a broker. Put in some money. Get to use leverage! Wow. This is pretty intense. Go long that. Go short this. Whoa, it’s going the wrong way. Better get out. Whoa, that was quick. What just happened? Read some more. Whoa, they are fucking me the same way they fucked people 100 years ago. Read some more. “Dark Pools”? What the fuck is a dark pool. Read some Bloomberg News. Dark pools get “investors” better prices. Oh OK. But wait! What if you are selling rather than buying? Funny they don’t talk about that. Shilling pure and simple. Just like the MSM coverage of politics.
Well, to cut to the chase, Vegas is far far less greedy and far far more honorable than Wall Street. Wall Street likes derivatives because they make it far easier to strip you of your money. If you compared the average return on a derivative to the average return on a Vegas bet, you would probably find that the average derivative returns minus double the percent of the average Vegas bet. A Vegas bet might return -3% on average. A derivative bet might return -6% on average. And that is just part of the story. I don’t have time to go into all of it. Read zerohedge.com for a day and try to understand how bad it must be for a blog to convincingly sustain extreme cynicism day in and day out. Wall Street has so many tricks to steal people’s money it is hard to fathom. I got a good glimpse of just a handful, but I can now imagine just how brutal their whole menu of deceptive practices must be. One of the very trades I made was such that even the New York Times had to cover the story and ask whether the banks were engaged in brazen theft.
WALL STREET’S DERIVATIVES ARE NOT INVESTMENTS, THEY ARE WORSE THAN THE WORST SLOT MACHINE IN VEGAS
I DOUBT MANY PEOPLE IN CONGRESS KNOW HOW THEY WORK. AND I DOUBT EVEN IF BARNEY FRANK REALLY KNOWS. HE THINKS HE KNOWS. BUT EVEN HE PROBABLY DOESN’T REALIZE THE EXTENT OF THE SWINDLING HE DEFENDS.
HUNDREDS OF TRICKS TO TAKE THEIR CLIENTS MONEY.
I didn’t expect to beat the derivatives markets. But even I was shocked. And I had lived in Vegas.
VEGAS BETTER “INVESTMENT” THAN WALL STREET.
Sorry for the caps.
I just wanted to tell you FDLers: If you haven’t traded a derivative, if you don’t know what it is to get “stopped out”, it is far far far far worse than you are thinking.
MOST DERIVATIVES ARE NOT NECESSARY FOR A MODERN ECONOMY. THEY ARE JUST WAYS TO RIP OFF YOU, YOUR PARENTS, AND YOUR CHILDREN.
I hope you will take time to share your experiences in a MyFDL diary, without the CAPS LOK key, please. It sounds very interesting; I and probably others would like to know more. I wondered where you had been, sounds like you caught the bug.
I pop in from time to time. Yeah, sorry about the caps. I just wanted to be emphatic without writing 3000 words–which is what it would take. I’m sorry, but I have a no diary policy. Just a commenter.
What bug? I don’t follow.
You changed your picture right? Confused me for a moment.
Very good article and truthful, the commodities are the same way and will strip you of all of your investment capital in a very short time. Of course, derivatives are commodities. I thought there was a familiar note in all this, waht a grate cu tnry
Actually no. Commodities are money. Everything else is just paper. And derivatives are the most worthless paper of all.
the parasite is getting closer to killing the host
Well, derivatives are bets. By nature they are zero sum. Winners + losers + middleman transaction fees(bankers) = 0.
Given the overall zero sum nature of this “product”, things must sum out to zero in the long run. If fantastic winnings were awarded in the early years of these products then they will be followed by fantastic losses in later years.
For example, say that 1 Quadrillion in derivative products were created before 2008 and that the average return combined with transaction fees amounted to +1% during that time period. That’d mean that the gamblers had taken 10 Trillion out of a game which in the long run will be zero sum. Thus, there would now be 10 Trillion in losses awaiting the participants from that time forward. And when the losers can’t/won’t pay up…. we have situations like AIG.
And as you point out, these folks were/are dealing in extremely leveraged positions so the losers often cannot pay up. When the banks themselves end up on the losing side, they can play accounting games to hide their losses. When the loss hiding breaks down then the taxpayer flips the bill.
The entire thing is a criminal racket, Geithner & Co should be in jail.