1 Boring Old Man

In a Bucket Shop, one is betting on something in the future. Of course, there have long been other Markets where one buys something in the future – the Commodities Markets. They’re a betting game as well, but something real changes hands and the Market benefits buyer and seller. The Commodities Markets have a different history from the Stock Market, in part because Commodities have changed over time. With Stocks, the Securities and Exchange Commission [S.E.C.] that regulates them came into existence all at once as part of the New Deal. The regulation of Commodities has evolved more slowly. Finally, in 1974, the Commodity Exchange Authority in the Department of Agriculture was replaced by the Commodity Futures Trading Commission which regulates all commodity futures trading. In negotiations between the S.E.C. and the C.F.T.C. to divide up the turf, there was one area they couldn’t agree on. So in 1982, the Shad-Johnson Accord was an agreement that prohibited the trading of single-stock futures and narrow-based indices [I don’t know what they are either, but it’s very close to the futures betting like in the Bucket Shops, in that nothing changes hands.]. The idea was to ban this trading until the S.E.C. and the C.F.T.C. figured out who would regulate this Market. They never got around to it.

^{… Gramm’s most cunning coup on behalf of his friends in the financial services industry—friends who gave him millions over his 24-year congressional career—came on December 15, 2000. It was an especially tense time in Washington. Only two days earlier, the Supreme Court had issued its decision on Bush v. Gore. President Bill Clinton and the Republican-controlled Congress were locked in a budget showdown. It was the perfect moment for a wily senator to game the system. As Congress and the White House were hurriedly hammering out a $384-billion omnibus spending bill, Gramm slipped in a 262-page measure called the Commodity Futures Modernization Act. Written with the help of financial industry lobbyists and cosponsored by Senator Richard Lugar (R-Ind.), the chairman of the agriculture committee, the measure had been considered dead—even by Gramm. Few lawmakers had either the opportunity or inclination to read the version of the bill Gramm inserted. "Nobody in either chamber had any knowledge of what was going on or what was in it," says a congressional aide familiar with the bill’s history.}

^{It’s not exactly like Gramm hid his handiwork—far from it. The balding and bespectacled Texan strode onto the Senate floor to hail the act’s inclusion into the must-pass budget package. But only an expert, or a lobbyist, could have followed what Gramm was saying. The act, he declared, would ensure that neither the sec nor the Commodity Futures Trading Commission (cftc) got into the business of regulating newfangled financial products called swaps—and would thus "protect financial institutions from overregulation" and "position our financial services industries to be world leaders into the new century."}

^{It didn’t quite work out that way. For starters, the legislation contained a provision—lobbied for by Enron, a generous contributor to Gramm—that exempted energy trading from regulatory oversight, allowing Enron to run rampant, wreck the California electricity market, and cost consumers billions before it collapsed. (For Gramm, Enron was a family affair. Eight years earlier, his wife, Wendy Gramm, as cftc chairwoman, had pushed through a rule excluding Enron’s energy futures contracts from government oversight. Wendy later joined the Houston-based company’s board, and in the following years her Enron salary and stock income brought between $915,000 and $1.8 million into the Gramm household.)}

^{But the Enron loophole was small potatoes compared to the devastation that unregulated swaps would unleash. Credit default swaps are essentially insurance policies covering the losses on securities in the event of a default. Financial institutions buy them to protect themselves if an investment they hold goes south. It’s like bookies trading bets, with banks and hedge funds gambling on whether an investment (say, a pile of subprime mortgages bundled into a security) will succeed or fail. Because of the swap-related provisions of Gramm’s bill — which were supported by Fed chairman Alan Greenspan and Treasury secretary Larry Summers — a $62 trillion market (nearly four times the size of the entire US stock market) remained utterly unregulated, meaning no one made sure the banks and hedge funds had the assets to cover the losses they guaranteed…}

^{As you can tell, both the CFMA and GLB call for unprecedented joint supervision among regulators in overseeing new financial entities and new financial products. From the Commission’s standpoint, we must contemplate how these new financial entities and new products will impact market integrity, investor protection and overall competition. Our challenge is to find an effective way to coordinate with other regulators and try to arrive at a single effective regulatory approach that will address their concerns and ours while encouraging marketplace growth and competition.}

But alas, if they "contemplate[d] how these new financial entities and new products will impact market integrity, investor protection and overall competition," that’s all they did – contemplate – because these Bills opened up a black hole in the financial cosmos that threatens to engulf us all. It took them only 20 years to undo the financial history of the 20th century.

• ^{Depository Institutions Deregulation and Monetary Control Act of 1980:}
• ^{Garn-St. Germain Depository Institutions Act of 1982:}
• ^{Gramm-Leach-Bliley Act of 1999:}
• ^{Commodity Futures Modernization Act of 2000:}

If one buys a bond, one might enter a credit default swap contract to pay a premium for insurance on the bond. If it pays off, you lose your premium. If it fails, the insuror makes good on your investment.

So, our current Financial crisis isn’t only the Housing bubble. In fact, that’s the more managable piece of the story. And it’s not the defaulted loans themselves. It’s the credit default swaps, the bets placed on the Mortgage Market, that are the black hole. It’s why Bush’s Bailout Plan was idiotic. Bailing out the Banks just gives them money to pay off their credit default swap contracts, and does nothing for the mortgage holders or the credit market. Presumabely, that’s being straightened out in response to the primal moan from the economists.