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Final Dodd-Frank Derivatives Regulations Have Been Approved; JYF.

In a recent diary I’d written, I’d mentioned that Gary Gensler, who  had reportedly turned over a new leaf since selling out the heroic Brooksley Born, at the CFTC was holding a final series of meetings before deciding the really and truly final rules this time.  It’s been two years since Dodd-Frank was signed into law by President O’Bomba.  You will likely remember that his administration blocked any actual regulatory amendments at every turn; Dodd-Frank was what was left, and even then, the bill said that regulators would come up with some really good rules to ensure full transparency of most some derivatives, and their sale would be put onto clearinghouses that would guarantee…yada, yada.

Here’s Lauren Lister speaking with Alyona about it in December, just for a refresher.

Out front, I need to say that I am a serious fan of irony.  When I first read one small bit of news at Bloomberg last week, all I could do was laugh.  I’d almost decided not to write it up, but after watching parts of Frontline’s ‘Money, Power and Wall Street‘ last night, I did some burning at the sheer incredulity of the failure to re-regulate Wall Street for real, as in: repeal the CFMA and Glass-Steagall (dream on, eh?)

Of course, it turns out that since the meltdown, derivative sales have actually increased, and figures show that there are about 700 trillion dollars worth of them out around the world.  Seven hundred trillion, that is.  Demonocracy has great graphics showing the derivatives exposure of the top nine biggest Too Big To Fail, Too Big To Bail banks at $228.72 Trillion. Peek at it, and imagine if all $700 trillion were represented, especially considering that global GDP is about $68 trillion.

My particular favorite Swingin’ Dick, Jamie Dimon is going very bullish on derivatives; guess OBomba, his BFF, told him it was a risk-free idea.  Heh.

From Randall Wray via the annual Minsky conference, these words from two attendees:

“First, Joe Stiglitz had a great analogy about derivatives. Recall that part of the reason for the creation and explosion of derivatives was to spread risk. For example, mortgage-backed securities were supposed to make the global financial system safer by spreading US real estate risks all over the world. He then compared that to, say, a deadly flu virus. Would you want to spread the virus all over the world, or quarantine it? Remember Warren Buffet’s statement that all these new financial products are “weapons of mass destruction”–like the 1914 flu virus. And, indeed, just as Stiglitz said, spreading those deadly weapons all over the world ensured that when problems hit, the whole world financial system was infected.

The other observation was by Frank Partnoy, and also addressed the innovations in the financial sector. He said that these innovations mostly exploit information asymmetries in order to:

a) dupe customers (think Goldman Sachs and John Paulson constructing synthetic CDOs sure to blow up, and betting against Goldman’s customers who bought them); and

b) engage in regulatory arbitrage (evade rules, laws, supervisors, etc; ie, move trash into SIVs to evade capital requirements).

So here’s the question: why on earth do we let protected financial institutions—that have Uncle Sam standing behind them to clean up the mess they make—engage in such activities.[?]”

Sorry, I’m wandering around Dobbin’s barn here, and you want to be let in on the joke.

Okay.  The regulators at the CFTC have been weighing all these questions about ‘what is a financial entity’, ‘who is a swap dealer’, ‘which end parties should be exempted’ etc.  But this bit concerned how big does a bank doing swaps have to be to be regulated in terms of capitalization and be required to sell through the clearinghouses?

Well, they’d been talking about the figure of $100 million of notional value, or the total value of a leveraged position’s assets.  But jeez; the Big Banks said it wasn’t fair, and the lobbyists made their case to Gensler and the SEC.  You guessed it.  Within a few weeks, they announced the new bar:


(courtesy of matthewnstoller via flickr)

$8 Billion in swaps a year.  And that’s an increase of 7,900 %. Karen Weise writing at Bloomberg said that the argument was that the smaller players shouldn’t be burdened with extra requirements that would ultimately drive up costs for consumers.  And that:

“By one estimate, that means 60 percent of swap dealers will now be exempt. Those companies, ranging from banks to energy and agricultural firms, can breathe easier now that they’re exempt. As for what the new rules mean for risk in the market, regulators say they’ll reevaluate in five years, when the threshold defaults down to $3 billion.”

Smaller firms.  And loopholes for ‘foreign’ end-users, who knows what all…

Jump, you fuckers; you purveyors of economic terrorism.


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