Loopholes Will Be A Problem for Derivatives Bill

Amazing, there is a serious lack of courage to take on financial oligarchy and the corporate oligarchy. First, we hear that they are already watering down the legislation for the Consumer Financial Protection Agency. Now comes word that there is a proposal for a huge loophole in the derivatives bill:

Legislation by Representative Barney Frank to tighten derivatives regulation contains an exemption that may let most financial firms escape new collateral and disclosure rules, the head of the Commodity Futures Trading Commission said.

So, is this going to be one of those political exercises that says look we did something for show with no substance?

This a very brief summary of what is on the table:

A plan offered by the Obama administration would subject all swaps dealers and “major market participants” to new regulations for capital, business conduct, record-keeping and reporting. Frank’s version would exempt corporations from that definition if they use derivatives for “risk management” purposes.

Risk management is a pretty broad term. Gary Gensler, chairman of the Commodities Futures Trading Commission said of Frank's proposal:

As just about all swaps could be defined as being used for risk management purposes, we’re concerned that unintentionally the category of ‘major swap participant’ could have been narrowed so significantly, or even to a null set,....Major hedge funds” may be excluded from oversight, as may the mortgage-finance companies Fannie Mae and Freddie Mac “because of course the government-supported enterprises use swaps for risk management purposes. "Risk Management" exclusion should be eliminated

No, surprise guess who loves Frank's proposal. Business groups such as National Association of Manufacturers and the Securities Industry and Financial Markets Association. Oh, yes, and those Corporate Democrats that love big corporate money.

Any loopholes to the derivatives bill will only serve to render it ineffective. Corporations and financial conglomerates are great at exploiting loopholes. Don't believe the hype about how the "sky is falling" and poor Cargill won't be able to hedge its risk in commodities prices. Bullshit, they don't want nothing to hinder their upside such as a cash margin requirement but what about the systemic risks of the OTC market - well Cargill would prefer that taxpayers assume that risk. Fu*k them!

UPDATE: This is from Financial Times Editorial:

The problem is not just that any loophole will be used to expand the activities the regulation is meant to target – although that is a serious risk. (Cargill, the food company, did not assuage this concern: its congressional testimony about price hedges it offers to bakeries nicely illustrated its side business in swaps dealing.)

It is also that the reason why non-financials might face higher costs by being included in the new rules is precisely the reason for so including them. Costly margin requirements indicate they buy derivatives that not only insure against the market moving against them but can put them at risk of having to pay out in the opposite case. That they find such contracts cheaper than paying upfront for insurance and enjoying windfalls in favourable conditions suggests precisely that the systemic risks of the OTC market and the investment banks that participate in it are still borne by others, namely taxpayers.

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"risk management"?

Didn't the entire credit default swaps start as "risk management"? Sounds like that is a loophole one can drive a truck through.

I did a first pass in thomas.gov looking for any actual bill language. It would be useful to examine that and I didn't see anything by Frank w.r.t. derivatives.

More on the Corporate Democrats and Financial Oligarchy

More from Bloomberg:

Derivatives Lobby Links With New Democrats to Blunt Obama Plan

As President Barack Obama vowed in a Sept. 14 speech in New York’s Federal Hall to correct “reckless behavior and unchecked excess” on Wall Street, Mike McMahon and Barney Frank sat in the audience discussing how to ease proposed rules for the $592 trillion over-the-counter derivatives market.

Side by side at 26 Wall St., across from the New York Stock Exchange, freshman congressman McMahon told House Financial Services Committee Chairman Frank he was worried that Obama’s derivatives plan, released in August, would penalize a wide swath of U.S. corporations and could push jobs in his home district overseas, McMahon said in an interview.

According to the article, Congressman McMahon represents a large number of Wall Street workers.

Let's be clear this is a battle between higher upsides versus protection against systemic risk.

Don't be fooled by the "sky is falling" from non-financial companies.

RebelCapitalist.com - Financial Information for the Rest of Us.

if he doesn't want jobs pushed overseas

enact legislation to stop jobs from going overseas.

This ain't rocket science and they need to call cash on this absurd "protectionism" rant ....as if every other nation on earth isn't providing some protections for their labor.

Not declare "hey that Ponzi scheme employs a lot of New Yorkers".

What really is at stake is huge profits of swap dealers

In a likely more transparency and clearing would narrow bid/ask spreads. This would have a dramatic impact on the profits of JP Morgan, Goldman Sachs and other swap dealers because they make their money off the spread which are probably pretty sizeable in the opaque world of OTC swap markets.

RebelCapitalist.com - Financial Information for the Rest of Us.

Proposal for Derivatives:

Attention Congressman Grayson:

Here are two proposals regarding derivatives:

1) Ban trading of Credit Default Swaps and Collateralized Debt Obligations.


2) Repeal the Commodity Futures Modernization Act as Barry Ritholtz proposes.

RebelCapitalist.com - Financial Information for the Rest of Us.

I think

everyone on this site has said reinstate Glass-Steagall.

Glass-Steagall will work for the financial conglomerates

but there is the derivatives market (especially CDS) that played a big role in the crisis.

There were 2 big DE-regulatory laws signed by Pres. Clinton (and strongly advocated by Larry Summers)

1) Financial Services Modernization Act of 1999 (AKA Gramm Leach Bliley Act); and

2) Commodity Futures Modernization Act of 2000

Besides Clinton, Phil Gramm crafted both of these wonderful pieces of legislation. The same Phil Gramm is vice-chair of tax evasion machine - UBS and who was #2 in Time Magazines 25 People to Blame for the Financial Crisis

RebelCapitalist.com - Financial Information for the Rest of Us.

Rebel, I think you've got this wrong

GLBA repealed Glass-Stegall. To say "repeal GLB" is almost it, but Glass-Stegall separated commerce from banking. i.e. it put together categories of banks, investment banks, commercial banks and they could not be the same entities. Then it created the FDIC to protect deposits in commercial banks.

So, I do not think Glass-Steagall will help banks at all, which is why you see people like Simon Johnson, William Black and most of the economic bloggers saying Glass-Steagall needs to be reinstated, it's one and the same...but not quite, while you can repeal GLBA, that doesn't mean one reinstated Glass-Steagall, i.e. put up a "wall" where investment and commercial banking are completely separated.

Also, reforms real people are saying are not just reinstate Glass-Steagall. They are also basically saying to repeal the Commodities Futures Modernization act. Even Geithner's proposal does repeal quite a bit of CFMA.

I meant that repeal of GLBA or re-enact some form of Glass

Steagall will address the TBTF problem. But you are right and I agree there are 2 major issues: TBTF and derivatives market.

Both Clinton era laws need to be repealed.

RebelCapitalist.com - Financial Information for the Rest of Us.

ah, ok

but I don't think just a repeal reinstates the separation of investment from commercial banking.

Galactic-sized loophole

Yup, that is surely one galactic-sized loophole in Frank's derivatives legislation.

No surprise that Securities Industry and Financial Markets Association loves it; Blythe Masters is the chair of that and she was the creator of the credit default swap at JPMorgan.

Heard the intrepid Elizabeth Warren the other night on NPR (only reason I would listen to them, they are as bad as Fox, only a bit more subtle) along with that douche, Robert Reich. While I realize Reich is a fundamentally nice guy, he was wrong about everything last night with but one exception: his correct mention of that colossal loophole in Franks' legistlative proposal.

I truly admire Prof. Warren for going on the same show as Reich -- even I wouldn't lower myself to dialog with that clown. He still is clueless and still believes in the "uncorrelated assets" fantasy, as well as unemployment being disconnected - and uncorrelated - to the other economic deficits. (Madam Warren is such a breath of fresh air: highly intelligent and knowledgeable as well as honest and brimming over with integrity -- the smallest minority in America today!)

Only the absolute regulation, or better yet, demise, of unchecked securitization and credit derivatives, private equity leveraged buyouts, offshoring of jobs and importation of scab workers, and the reinstatement of Regulation Q or those anti-usury laws, will change anything --- and they must be done simultaneously, yet we all realize that will never happen!

many disconect unemployment with reality

Even Blinder appears to be kowtowing the "party line" and backtracking on offshore outsourcing as "protectionism".

For the first time, I heard Roubini mention trade policy, offshore outsourcing as some of the causes of long term unemployment in the U.S.

It's pretty ridiculous. They claim it's all "protectionism" and I am like, right, I'm sorry but to rebuild the U.S. economy is protectionist. hmmm, ok.

But yeah, it seems in terms of committee chairs...lobbyists target them most of all, for they are the "gate keepers" and bury good legislation on a daily basis.

So, at this point it looks like Frank sold out. I don't know how else to call it.

But where is the leadership from the WH

Gary Gensler, of all people, said that this loophole was huge. The President is speaking right now about financial regulatory reform.

At some point the Administration has to start knocking heads or at least decide if they are with us or against us.

As for "protectionism" - I am sick of this meme that somehow using exactly trade laws and enforcing them is "protectionism".

RebelCapitalist.com - Financial Information for the Rest of Us.

I have been highly critical of the Obama Administration

and will continue as long as Larry Summers and Timothy Geithner are part of it. Having said that, I just listened to the President speak on the Consumer Financial Protection Agency. He did call out the U.S. Chamber of Commerce for its role in trying to kill the CFPA legislation and he called out the financial conglomerates as well.

He did mention the "plain language" provisions that Barney Frank has dropped from the legislation. Was that a message to Barney Frank? We will see if he backs up this strong rhetoric with actions.

RebelCapitalist.com - Financial Information for the Rest of Us.

Melissa Bean

I cannot believe that IL district re-elected her. She is such a corporate troll. So of course she's front and center of a bought and paid for by the financial lobby.

They tried like hell to get a real representative into the Democratic slot as well as ind. and it's the same shit everywhere in Congressional races...the corporate puppet wins.

HuffPo has some details on the outrageous sell out of Congress.

And that EXPORTS thing

For the longest time I have ben stymied by the exports data and how it never appears to correlate to employment, either state-by-state or federally. One of those red herring arguments against tariffs has been the "necessity of exports" to the economy.

Recently I learned how they have been running this scam (not unlike the "profit laundering" at offshore finance centers): they count every item shipped out of the country to their foreign factories as an "export" and list its price --- which is clearly fraudulent as they are not being paid for it (why does this seem so familiar????).

So, take Boeing for instance: a goodly portion of their jets are built overseas, so if less than 50% of each jet is manufactured in the USA, then when they sell it they are falsely claiming full price as an export (thereby doubling the amount of exports at this point).

BUT, they have counted any and all items shipped out to various offshore factories as exports (thereby quadrupling, or more, the number of falsely identified exports).

This may not be EXACTLY how it works, but it is the gist of the reporting process, such that the number and value of exports never makes sense in light of constant and continuing unemployment in the USA (think back to that BLS study the NY Times reported on a few weeks ago, stating that effectively ZERO jobs had been created in the Private Sector during the period of July 1999 to July 2009 -- begins to make more sense now...).

Multiply this by ALL those items shipped back and forth from US corporations to offshore factories and facilities and everything begins to fall in place.

they mask global labor arbitrage

in a host of other terminology, such as productivity (and listen to those idiots on cable TV claiming it's all just "technological advances...BS!".....now this "income elasticity". I need to study this some more in terms of what it's really saying but that's what I get out of it...

Ya know, the entire U.S. economy is basically being transferred to China....the results are in and this ain't too good for America here.

Myself, I am not so strong on tariffs and surprise, surprise, one tool to help level trade is a VAT and Pelosi just endorsed a VAT recently.

Now anyone who endorses a VAT gets it from both ends...

the left mistakes it as a regressive tax instead of an "at the border" adjustment tax and the right calls it a "tax" and then rails against people claiming they are "raising taxes" and how they should get rid of the "income tax" ...
for a straight "flat tax" is not a VAT and would be absurdly regressive...

so anyway, that was surprising because in the U.S. a VAT is just not understood as a trade tool...

but there are a host of tools they could do without resorting to tariffs.

More lobbyists complaining:

This from the Loan Syndications and Trade Association.

Proposals to regulate privately negotiated derivatives may reduce “sorely needed liquidity” in the high-yield, high-risk loan market, according to the Loan Syndications and Trade Association.

Maybe, we don't need so much liquidity in the high-yield, high-risk loan market. Maybe, we don't need Total Return Swap dealers making a killing on spreads and threatening systemic risk. Maybe it's time to have a real discussion about the economic and societal benefits from some of these derivatives.

RebelCapitalist.com - Financial Information for the Rest of Us.

This is such a brazen example of Congressional Corruption

Derivatives, the shadow banking system only just almost caused (and did cause) a global financial collapse, yet these jokers want to continue and expand on their Ponzi scheme game.

We already know the credit ratings agencies wrote fiction on these things....

and it gets worse. The models themselves, from the mathematics are not valid and create systemic risk in and of themselves!

So, the fact we're a year out and now have these same idiots trying to block any reforms is just beyond the pale. Not only is it stupid, it's putting the entire global economy at risk, never mind the U.S. economy.

trying to do end runs on House Finance Committee

Peterson, who heads the Ag committee is clearly trying an end run on the House finance committee...

which is what you have to do if one has a corrupt committee chair who will kill any meaningful reform in committee...

The bill procedures in Congress are just ridiculous in that each committee, which gives just a few really a lot of control on what bills will even make it to the floor for a vote and that's how a lot of lobbyists get bills killed...in committee.

To bring a bill to the floor to bypass committee requires an enormous among of cosponsors and even then, House leadership can kill a bill.

It's amusing to see people

It's amusing to see people calling for a reinstatement of Glass-Steagall as a solution to TBTF. It's as if they don't realize that Lehman was a pure investment bank. So was Bear Stearns. Glass-Steagall would've done absolutely nothing to prevent the risk-taking and eventual downfall of either Lehman or Bear.

Try again.

I think you're missing

how interconnecting those firms were to Citigroup, Goldman Sachs and JPMorgan Chase. I also think you're missing the entire AIGFP unit.

Also, no one is saying "just" reinstate Glass-Stegall and that solves all things. It's one of many regulatory changes, the biggest being on derivatives being regulated.