Banks and Derivatives: BIG…

Posted on Thursday 15 October 2009


Key House Panel Votes to Regulate Derivatives
New York Times

By STEPHEN LABATON
October 15, 2009

Bowing to political pressure from community bankers, the House Financial Services Committee approved an exemption on Thursday for more than 98 percent of the nation’s banks from oversight by a new agency created to protect consumers from abusive or deceptive credit cards, mortgages and other loans, The carve-out in legislation overhauling the regulatory system would prevent the new consumer financial protection agency from conducting annual examinations of the lending practices at more than 8,000 of the nation’s 8,200 banks, leaving only the largest banks and other lenders subject to the agency’s examiners.

Earlier in the day, the committee completed its work on a different contentious provision of the legislation when, on a nearly straight party-line vote of 43 to 26, it approved tougher regulations over the derivatives market. That provision, too, contained exemptions for many businesses…

The measure creating the new agency has already been significantly pared back from the Obama administration’s proposal. While the exemption approved on Thursday would cover a vast sector of the banking industry, those institutions control only about 20 percent of the roughly $14 trillion in assets held by commercial banks. The 150 largest banks, which would face more regulatory scrutiny, hold the remaining four-fifths of the assets…

The legislation’s chapter on derivatives would impose new regulations and capital requirements on dealers, and would force more trades onto exchanges or electronic platforms. But in a major concession to businesses, many trades intended to hedge risks by companies like airlines, manufacturers and energy interests would be exempt from trading through exchanges or clearinghouses…

The regulator, Gary G. Gensler, chairman of the Commodity Futures Trading Commission, vowed to try to strengthen the measure when it is considered by a second House committee next week. "The committee’s bill is a significant step toward lowering risk and promoting transparency," Mr. Gensler said. "Substantive challenges remain." He added that he hoped a final bill “covers the entire marketplace without exception"…

The derivatives legislation was criticized by consumer groups as being too weak and by Wall Street interests as being too onerous…
Our Democracy is just plain hard. Bills go through House Committees and Senate Committees. They get debated on the floor in the world of cloture and filibuster. Then the two bodies have to resolve their versions. Then there’s the President, and veto, and further votes, and the Bush add-on – Signing Statements. We mere mortals have little understanding of all of this and basically have to rely on what the journalists and politicians tell us, which is often imponderable.

But ponder it I will. The Bank part is pretty clear. When they say that 98% of the Banks are exempted from the consumer protection regulations being proposed, I don’t hear that as a major loophole. The big money Banks would be regulated and inspected [80% of the money]. That’s where the difficultym has been so the compromise isn’t a deal breaker. And there are a number of iterations where it might get tightened up even more. The megabanks are our problem.

As for Derivatives, I’m not excited by any exceptions there. I’m still skeptical that this concept of "hedging" is a nightmare ready to happen. I’m encouraged that the business listed as exceptions are airlines and manufacturing – these are not speculators. But the inclusion of "energy interests" worries me. Enron was in "energy interests." The bubble that burst last was an energy bubble [the oil bubble]. And remember our spurious $4+ gas prices. I prefer the sound of  "he hoped a final bill ‘covers the entire marketplace without exception.’"

To my mind, this bill is as important or even more important than the Healthcare or the Stimulus Bills. The profundity of this Recession was the result of runaway speculation and risk taking unequalled since the 1920s. While most of us suffered, many of the people "in the know" made fortunes. They’d love to do it again.

So, lots to think about here as things progress. That said, it did make it through the first vote, so it’s coming our way. For the Republicans to bloc vote against it is, by any measure, irresponsibility on the grandest of scales…
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    October 16, 2009 | 10:57 AM
     

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