derivatives reform

Geithner Exempts a $30 Trillion Derivatives Market From Regulation and Oversight

On Friday, the witching hour of government press releases they want no one to read, the Treasury Department announced they will block regulation of large classes of derivatives:

Treasury is today issuing a Notice of Proposed Determination providing that central clearing and exchange trading requirements would not apply to FX swaps and forwards.

This proposed determination is narrowly tailored. FX swaps and forwards will remain subject to Dodd-Frank’s rigorous new trade reporting requirements and business conduct standards. Additionally, the Dodd-Frank Act makes it illegal to use these instruments to evade other derivatives reforms. Importantly, the proposed determination does not extend to other FX derivatives, such as FX options, currency swaps, and non-deliverable forwards. These other FX derivatives will be subject to clearing and exchange requirements.

The entire press release is almost burying the announcement for no regulation of FX swaps and forwards. Multinational corporations use FX swaps to hedge on currency fluctuations. According to Better Markets, this will bring out the financial engineers for some sort of derivative trickery fiction:

Ratings Arbitrage - Letting the Credit Ratings Agencies off the Hook

An amendment just passed the Senate which allows regulators to assign a credit rating agency to evaluate asset based securities. To date, the ones hiring the credit rating agencies are the ones making up these fictional derivatives.

That said, we have this New York Times article reporting more investigations of banks, but this time trying to find evidence the poor little ole' credit ratings agencies were just played as suckers by the banks (cough, cough):

The New York attorney general has started an investigation of eight banks to determine whether they provided misleading information to rating agencies in order to inflate the grades of certain mortgage securities, according to two people with knowledge of the investigation.

Since ratings models were available to the ones creating the structured finance product, in this case, credit default obligations (CDOs), issuing firms could analyze the ratings methods to figure out where to hide the toxic, worthless crud contained within, yet still land a AAA rating.

Derivatives Reform is Under Siege!

This is astounding. We have former Federal Reserve chair, Paul Volcker, attacking the derivatives reform bill currently in the Senate.

The provision of derivatives by commercial banks to their customers in the usual course of a banking relationship should not be prohibited.

Really? Why is it then only 5 banks, Goldman Sachs, JP Morgan Chase, Citigroup, Morgan Stanley and BoA are 90% of the derivatives market? Yeah right, that's really helping Joe Blow in his small manufacturing business in Ohio. Oh yeah, Joe Blow, running his $20 million dollar part business is really busy trading derivatives to hedge risk in a global market. Right, and he's also hedging to control his energy costs. Uh huh. Show me the numbers on that claim! Even more importantly, Joe Blow is an end user. There is no reason he, as a banking customer, has to trade derivatives with that bank.

FDIC chair Sheila Bair also came out blasting on stopping banks from gambling with customers and taxpayer money.

Derivative Reform Under Attack by Lobbyists

What a surprise. A non-bank coalition is trying to gut derivatives reform. Hold onto your iPhone, that's right, Apple is among them. Seems they don't want to put up real money to cover their bets. There is some speculation that this end users coalition has actually been orchestrated by the dealers, the mega banks themselves.

Here is what the Huffington Post says is the meat of the lobbying gut efforts. Unfortunately the actual letter is not available.

  • Deleting provisions in the current Senate bill, authored by Banking Committee Chairman Christopher Dodd (D-Conn.) and Agriculture Committee Chairman Blanche Lincoln (D-Ark.), that call for swaps dealers, like JPMorgan Chase, Goldman Sachs, Bank of America, Citigroup, Morgan Stanley and Wells Fargo, to hold higher amounts of capital to support their derivatives bets;
  • Deleting a term defining major derivatives users, which calls for higher capital requirements and mandates that they clear their derivatives deals through transparent venues that require parties to post margin. By deleting this provision, the coalition wants to exempt an entire class of derivatives users from having to post cash upfront to support their bets.

Democrats Censor Reform Advocate

(ht Yves Smith - Naked Capitalism)

There was a poll released the other day that showed most people believe that the policies that are being discussed in Washington only help the "elite". This is certainly not good news for the Obama Administration and Democrats. It's pretty obvious why people feel this way with the $12 trillion bail out of the financial sector that is quickly returning to its old ways while unemployment and foreclosures continue to rise.

But there are other things that are happening that people may not be following that would confirm the sentiments reflected in the poll. The gutting of regulatory reform is one of them. Harper's Magazine has a story that about what transpired at a House Financial Services Committee on October 7: