Friday, October 9, 2009

How Obama is not regulating derivatives

In a recent blog post I quoted from a Bloomberg report:
The Obama administration sent Congress proposed legislation last month that would require the most active contracts in the $592 trillion over-the-counter derivatives market to be backed by clearinghouses and traded either on an exchange or on regulated systems.
Then I commented:
They waited until August -- one whole year -- to introduce legislation that would regulate, not prevent the trading of CDS, and not all kinds of CDS at that!
According to Clinton Administration Labor Secretary Robert Reich, the kinds of CDS to be regulated is of paramount concern. Reich blogs:
. . . . the draft has gaping loopholes that will let most financial firms escape — such as one that exempts corporations that deal in financial derivatives from any requirements for capital, business conduct, record-keeping, and reporting if they use derivatives for the purpose of “risk management,” which is the very thing they all claim they’re doing. Neither the draft bill, nor the Committee, nor anyone on the Hill having anything to do with financial regulation, is raising what I consider to be the two key reforms necessary for avoiding another financial meltdown — resurrecting the Glass-Steagall Act that once separated commercial from investment banking, and applying antitrust laws to the remaining five biggest Wall Street banks so none is “too big to fail.”
Of course, banks have gotten bigger not smaller since the financial crisis broke, using taxpayer funds to buy-out smaller competitors.   And it was the largest, most irresponsible banks that the US taxpayer helped, not smaller, more cautious regional banks.

Matt Taibbi writing in RS explains the relevance of Glass-Steagall:
In 1999, Gramm co-sponsored a bill that repealed key aspects of the Glass-Steagall Act, smoothing the way for the creation of financial megafirms like Citigroup. The move did away with the built-in protections afforded by smaller banks. In the old days, a local banker knew the people whose loans were on his balance sheet: He wasn't going to give a million-dollar mortgage to a homeless meth addict, since he would have to keep that loan on his books. But a giant merged bank might write that loan and then sell it off to some fool in China, and who cared?

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