This is a follow-up to my April 23rd post Derivatives Craziness And The Next Bailout. As predicted, Timmy Geithner has proposed exempting FX swaps and forwards from regulation as specified in the Dodd-Frank financial "reform" bill.
Under the requirements of the Dodd-Frank legislation, all FX swaps and forwards are supposed to be reported to a swap data repository or, if there wasn't one, to a regulator like the U.S. Commodities Futures Trading Commission (CFTC). The regulator is supposed to investigate irregular activity. Foreign exchange forwards and swaps represent about $50 trillion in nominal value of a total derivatives market of almost $600 trillion. Unfortunately, Congress gave some leyway to the U.S. Treasury to exempt some derivatives from regulation. If the U.S. Treasury has its way, FX swaps and forwards will not be regulated, and trillions of dollars of interest rate swaps and OTC forward contracts are almost certainly going to be restructured into the form of FX swaps and forward contracts, defeating the purpose of Congress.
Regardless of what the U.S. Treasury claims, FX swaps and forwards are high risk derivatives and were one of the primary reasons currency markets froze after the demise of Lehman Brothers...
Although the Treasury statement says that "the Dodd-Frank Act makes it illegal to use these instruments to evade other derivatives reforms," that is just what this exemption is likely to do according to Dennis Kelleher of Better Markets.
Mary Miller, Assistant Secretary for Financial Markets at the Treasury, justified the agency’s decision by telling reporters that the foreign exchange swaps market represents less counterparty risk than the rest of the derivatives market, in part, because participants make a fixed payment obligation at the outset of the contract.
“Market participants know the full extent of their own payment obligations and their exposure to the other party to a trade throughout the life of the contract,” she said. “This is not the case with other derivatives which have payment obligations that fluctuate with changing market conditions.”
She noted that even with the exemption, the market would be subject to new reporting requirements and business conduct standards. Forex swaps could be required to report trades to a global trade repository, Miller said.
Critics [i.e. the Big Banks] of new regulations for these types of swaps insist that they didn’t contribute to the financial crisis and generally aren’t risky. They contend that the new costs of regulation would result in fewer forex swaps and higher exchange-rate volatility.
Backers of heightened regulation insist that the market should be subject to the new regulations. They contend that such an exemption would make it possible for other types of financially engineered forex swaps that could be employed to hide problematic swap deals.
“The one thing we know for sure is that anytime there is an exemption from a regulatory rule, the financial engineers on Wall Street figure out how to cram as many new financial instruments through the loophole as possible,” said Dennis Kelleher, president of progressive watchdog group Better Markets Inc. “The area where the profits are the greatest is where there is the least transparency.”
He added, “for those people who think Wall Street is not going to come up with a whole sweep of products to fit into this exemption have missed what was going on for the past 30 years.”
If you listen to Mary Miller, FX swaps and forwards are harmless and risk-free. But that's not what the lessons of 2008 show. From the Huffington Post's Treasury Blocks Regulation Of Market That Sparked $5.4 Trillion Fed Bailout—
But a 2009 study by Naohiko Baba and Frank Packer of the Bank for International Settlements concluded that there were major "dislocations” in the foreign exchange market in the aftermath of the Lehman Brothers bankruptcy -- problems that were only resolved after the Fed pumped money into foreign central banks in order to ensure that global banks had access to dollars.
“After the bankruptcy of Lehman Brothers, the turmoil in many markets became much more pronounced,” wrote Baba and Packer. “In FX and money markets, what had principally been a dollar liquidity problem for European financial institutions deepened into a phenomenon of global dollar shortage”...
Miller insisted on Friday that the central bank’s actions in 2008 were not an emergency response to save a faltering FX market. “The Fed actually did not intervene in this market,” Assistant Secretary for Financial Markets Mary Miller told reporters on Friday. “I think some people confuse the extension of the Federal Reserve’s swap lines to central banks globally to provide dollar liquidity which was in high demand in the financial crisis, with the ForEx swaps and forwards market.”
Kelleher previously addressed this argument in a March 23 letter to Miller.
“While it is true that the Fed only lent via swap lines to foreign central banks and did not lend directly to the ForEx market, it nonetheless did so in part because the FX market was not providing sufficient dollars to foreign financial institutions,” Kelleher wrote.
These arguments are beyond ridiculous. The Treasury Department, which is supposed to represent the best interests of the People, represents the interests of the Big Banks, while outgunned reformers argue in vain that risks in the derivatives market must be properly contained. Here's the real reason behind Geithner's proposed exemption of FX swaps and forwards.
Foreign exchange derivatives, also known as the FX or ForEx market, are among the most profitable trading operations on Wall Street. “If the too-big-to-fail banks gave out academy awards, Geithner would be best supporting regulator year in and year out,” said Michael Greenberger, a former top official at the Commodity Futures Trading Commission, noting that Goldman Sachs scored $2.2 billion in trading revenue on FX in a single quarter last year.
There it is, Change You Can Believe In. There comes a certain point when talking about "reform" of a corrupt, co-opted government becomes absurd. While I admire the zeal of those who are trying to make sure the right thing gets done, isn't it time for people like Dennis Kelleher to ask themselves a simple question:
Why must I try to persuade the government, which is supposed to be on my side in these matters, to do the right thing? Why am I arguing with Mary Miller? Or more to the point, why is she arguing with me?
You either have faith that the system can be made to work, or you don't. However, if you understood the depth of the corruption you are up against, you would capitulate immediately. Why would you bother, knowing the Big Banks will always win in the end? I don't mean to be too hard on people like Kelleher, but there are only three types of people who still participate in our corrupt political system—
- The Players, who have a vested interest in the system
- The Pawns, who are ignorant about the system, or stupid, or brainwashed
- The Idealists, who never say die, although the fix is in
Marketwatch's Paul Farrell, doomer extraordinaire, recently wrote 2008 crash deja vu: We’ll relive it, and soon. Here's how he starts off—
Yes, another crash is coming, unavoidable, just like 2008. Not because our totally dysfunctional government is collapsing into anarchy, thanks to the 261,000 Super-Rich Lobbyists. Not just because our monetary system is run by the Bernanke Printing Press Company. And not just because a soulless conspiracy of Wall Street CEOs cares nothing for democracy and the public interest, only for their stockholders and their year-end bonuses.
Another crash is coming soon because we’re back playing the same speculative games as we did for years prior to the 2008 crash. When we collapse, it will be because America’s leaders never learn the lessons of history. Never.
I have no doubt that America's elites have not learned the lessons of history, but that is entirely irrelevant to what's really going on. The government is dysfunctional, but more importantly, it is corrupt beyond redemption. That's the lesson of this FX derivatives fiasco. Goldman Sachs made 2.2 billion dollars in trading revenue on FX swaps and forwards in a single quarter. What does that have to do with the "real" economy? With the public interest? With advancing the welfare of the American people? Nothing at all.
The elites are simply gaming a system they have co-opted for their own purposes. They are stealing while the stealing is good, skimming what they can from a failed capitalist system. They don't care if they blow themselves up, and take the rest of us down with them. As George Carlin, they don't give a fuck about you, let alone the lessons of history. And if they do blow things up, they'll simply bail themselves out.
The sooner people figure this out, the better off they'll be. At least they'll know what they're up against.
America is the fattest turkey in the history of mankind, and the rich are having their feast.
The rest of us get crumbs, but they're golden crumbs, which makes us feel really good.
There will be nothing left in a few decades, I'm sure of that.
Posted by: S P | 05/04/2011 at 04:45 PM