When Congress punted much of the rule-making for the Dodd-Frank Act to the financial regulatory agencies, they might as well have raised a white flag. As compromised as Congress is when it comes to dealing with their Wall Street donors, they have nothing on financial regulators who often end up later working for the people and companies they are supposed to be regulating.
Those working for the various financial regulatory agencies — SEC, CFTC, OCC — are in a prime position to cash in on their institutional knowledge and go work for Wall Street where they can make millions gaming the rules they themselves put in place. Though there has always been a “revolving door” between government and business, Wall Street has taken it to new levels and can offer the kind of money few other businesses can.
This revolving door dynamic between Washington and Wall Street leads to weaker loophole filled regulations that can easily be gamed by large financial firms. That’s exactly what is happening today thanks to regulators taking a dive on rules concerning derivatives trading.
According to an August 21 Reuters report, Wall Street firms successfully lobbied to have a huge loophole inserted into the Dodd-Frank Act that enables them to evade regulations on swap agreements. Now traders and firms can shift the location of the swaps to places like London and avoid the oversight that was supposed to be provided by Dodd-Frank.
The trades can no longer even be tracked by US regulators and, according to Reuters, “include some of the most widely traded financial derivatives in the world — such as interest rate swaps, where a bank takes a fee for exchanging a variable-rate interest payment for a fixed rate with a client, and credit default swaps, a sort of insurance where one party, often a bank, agrees to pay another party in the event of a bond default.”
Unregulated swap agreements caused AIG’s notorious collapse. Despite claims by AIG executive Joseph Cassano that it was difficult to “even see a scenario within any kind of realm of reason that would see us losing a dollar in any of those transactions,” AIG collapsed when its credit default swaps on mortgage-backed securities came due and the company could not pay because no one (like a regulator) forced them to be able to cover their bets.
According to an analysis from ProPublica, the total cost of the government bailout of AIG was $180 billion. And that’s not including the cost of the financial crisis AIG fueled with its reckless derivatives trading, which Better Markets calculated to be $20 trillion.
When the loophole was being inserted into the regulations at the Commodity Futures Trading Commission, Wall Street met with a set of 50 key CFTC staffers over ten times. In what is probably less than shocking news, 25 of those 50 staffers now work for Wall Street.
Apparently, we are going to run the deregulated derivatives trading experiment again and hope for different results.