Earlier today I wrote about the plan by the European Commission to launch an anti-trust investigation into the credit default swaps market. I thought I was done for the day but now comes word that our own government appears to be going the other way: weakening important rules for derivatives that were part of the Dodd-Frank legislation. Can you say, "next financial crisis"?
This is really sad:
The Treasury Department said Friday that it plans to exclude foreign-exchange instruments from key portions of new derivatives rules, as being devised under last year's Dodd-Frank financial-overhaul law, in a move certain to please banks and business groups.
Treasury officials said the instruments, known as foreign-exchange swaps and forwards, shouldn't fall under the same rules as other derivatives. Doing so, they said, could expose the market to greater risk and instability, a key argument by industry groups that pushed for the exemption.
WTF? Let's see: the very industry that caused the instability and risk that led to the financial crisis is now going to be handed rules that...will create even more risk. Ridiculous. And, not surprisingly, the news is being release on a Friday afternoon, while the attention of the country and the media is elsewhere (even without the disaster in Alabama, the media was going to be filled with royal wedding blather and the now-delayed space shuttle launch)
The risk?:
Many advocacy groups say that treating one class of derivatives differently will sabotage the intent of the financial-overhaul law. "We believe that an exemption for [foreign-exchange] swaps and forwards would create a loophole that could be exploited to undermine the purpose of the Dodd-Frank act," said Heather Slavkin, senior legal and policy adviser for the AFL-CIO Office of Investment.
Ms. Slavkin and other critics argue the exempted foreign-exchange products can be used to replicate many of the interest-rate swaps that the law seeks to regulate and which can be used to make risky speculative bets. "We're afraid that it's going to open up an opportunity for arbitrage," she said.
"Once you have an exemption for [foreign-exchange] transactions, you immediately have one that also covers interest-rate transactions, and the two together represent roughly 90%" of over-the-counter derivatives trades, said Antonio Mello, a finance professor at the University Of Wisconsin (Madison) School of Business. "So that would be a major portion of the [over-the-counter] market that would immediately become somewhat exempted" from the new derivatives rules. [emphasis added]
And, now, I'm going to make a leap of logical connection which people may fairly say is not fair. Earlier in the week, I wrote about key hedge fund managers moving their political money to the Republican Party because they aren't happy about being criticized by the Administration--criticism, I would point out, that has been pretty mild if you believe, as I do, that prison cells should be filling up with a whole lot more of the people who created the financial crisis.
I have no proof at all this this is connected. But, you have to wonder how much of the rule-making at Treasury is being influenced by the political calculation of the 2012 fundraising game. Something to think about.
But, in any case, this is just fucking stupid.