Geithner Adopts Part of Wall Street Derivatives Plan
By Matthew Leising
May 23 (Bloomberg) -- The U.S. Treasury’s plan to regulate the over-the-counter derivatives market outlined by Secretary Timothy Geithner on May 13 contains recommendations similar to those made by Goldman Sachs Group Inc., JPMorgan Chase & Co., Credit Suisse Group AG and Barclays Plc three months earlier.
The banks sent the Treasury a plan written in February titled “Outline of Potential OTC Derivatives Legislative Proposal,” saying the Federal Reserve should extend capital and margin requirements to companies and hedge funds that trade in the $592 trillion unregulated market, according to a document obtained by Bloomberg News and confirmed by the Treasury. Energy companies, corporations and hedge funds don’t face such requirements now, while banks do under central bank oversight.
“The banks appear to wish to maintain the intra-dealer market and raise barriers to new entrants to keep the OTC business as compartmentalized as possible and to protect their profitable market conditions,” said Brad Hintz, an analyst at Sanford C. Bernstein & Co. in New York. “The Street’s lobbyists appear to be asking for a ‘club’ structure in OTC trading.”
On May 13, U.S. officials called for increased oversight of over-the-counter derivatives to reduce risk to the financial system. Derivatives contributed to the failures last year of Lehman Brothers Holdings Inc. and American International Group Inc., leading to the seizure of credit markets and causing more than $1.4 trillion in writedowns and losses amid the worst financial crisis since the Great Depression.
The Treasury hears from many interested participants while crafting policy, said spokesman Andrew Williams. Derivatives are contracts whose values are tied to assets including stocks, bonds, commodities and currencies, or events such as changes in interest rates or the weather.
“This proposal had little impact on our final result,” he said. “Our proposal calls for dramatically increased transparency and the enhancement of regulatory powers to prevent market manipulation that go well beyond anything in that draft.”
Bruce Corwin, a spokesman for Zurich-based Credit Suisse, and Goldman Sachs spokesman Michael DuVally and JPMorgan spokesman Brian Marchiony declined to comment on the bank draft. Representatives from New York-based Goldman Sachs and London- based Barclays didn’t immediately return calls and messages for comment left after normal business hours.
Geithner sent a proposal to Congressional leaders on May 13 laying out his plan to police the unregulated market where swaps based on interest rates, currencies, commodities and a company’s ability to repay debt are traded.
“All OTC dealers and other firms who create large exposures to counterparties should be subject to a robust regime of prudential supervision and regulation,” the proposal said. These included “conservative capital requirements,” “reporting requirements,” and “initial margin requirements.”
The bank-written plan, dated Feb. 13, said the systemic regulator “shall promulgate rules” requiring “capital adequacy,” “regulatory and market transparency” and “counterparty collateral requirements.”
“Better the devil you know than the devil you don’t,” said Robert Webb, a finance professor at the University of Virginia in Charlottesville, describing the bank’s preference for their current regulator.
The banks sought sole authority for the Fed over the market and limited the role of the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission, according to the document. The three agencies currently share information in the $28 trillion credit-default swap market.
Geithner’s proposal didn’t specify what agency or combination of agencies should oversee the market.
The Obama administration favors the Fed becoming the new systemic risk regulator to oversee financial companies that could pose a danger to the banking system, according to participants in a May 8 White House meeting.
While the central bank has been favored to take the job since a proposal by former Treasury Secretary Henry Paulson last year, lawmakers and some regulators have shifted away from that view. Federal Deposit Insurance Corp. Chairman Sheila Bair and SEC Chairman Mary Schapiro earlier this month recommended that a council of regulators assume the role.
Geithner’s plan goes further in many aspects than what the banks laid out in their draft.
No Clearing Requirement
The Treasury Secretary is proposing mandatory guaranteeing of private contracts with clearinghouses for standardized OTC contracts such as interest-rate swaps or indexes of credit- default swaps and increased electronic trading to improve price transparency for customers. He also wants required reporting of positions and trades.
The bank proposal doesn’t endorse clearing of OTC derivatives. In annotations to the draft it states “Note that the proposed outline does not propose any specific OTC derivatives clearing requirement.” It also says reporting requirements on trade data should be made to regulators “upon request.”
Webb said any regulation over the market should be applied evenly. “It’s not clear requiring everyone to have the same capital requirements is necessary,” he said. He added that banks have worked closely with the Fed for many years.
“You’re going to see some close ties between the industry and the regulator,” he said.
Going to see some close ties? Ha, ha, the industry and the regulator are already one in the same and have been for years. This is exactly how our system now works. The central banks draft and propose legislation to their cronies who they have inserted inside of the Treasury and Fed (the central banks are the Fed). Their sponsored mouthpieces then say and spin any unacceptable language into something that sounds as if they are doing something to protect the “people” or the economy.
My position is that there is NO legitimate need for more than 90% of the world’s derivatives. For the few remaining legitimate uses, a PUBLIC exchange is absolutely the right thing to do, but only if there is complete transparency, an OPEN market, and a proof requirement that sufficient capital reserves exist to fulfill the obligations of the contracts that are executed. Such an exchange should be overseen by an outside agent.
I don’t see any of that in this proposal. I see a power grab by the central banks to create a monopolized exchange where they can be in control without outside supervision. Thus they will have created the appearance of change without actually accomplishing anything. This has pretty much been their M.O. from the beginning, the “stress test” being the latest example.
Just yesterday I was speaking with someone I met and we were discussing the economy and real estate. I mentioned the failure of Washington Mutual and this person, who I would say was ABOVE AVERAGE informed, quickly replied that Wamu hadn’t failed, that they had been bought out! LOL, that’s the spin that’s been created and believed! Of course no one in our media is asking what happened to all the Wamu pools of option arm loans that were going bad… where do all those pools now reside? At JPM, of course, the most toxic organization on earth, yet the very ones who “passed” the “stress test” with flying colors AND are the ones proposing this latest sham.
I propose that we will not have a REAL economy again until both JPM and GS no longer exist. That day is coming sooner than either of those two firms realize. The securitization of debt process via derivatives have led our economy to the brink. We had better wake up and do something about it which is REAL lest we wake up to find that we are on the eve of destruction... (if you don't see the connection between these institutions, politics, and events of the world, then you are looking in the wrong direction - their point entirely.
Barry McGuire - Eve of Destruction: