Is the fix already in when it comes to derivatives regulation on Wall Street? Has Main Street just been railroaded?
No sooner does Gretchen Morgenson's piece, "Even in Crisis, Banks Dig in for Battle Against Regulation," appear in Monday's NY Times on the showdown between Congress and Wall Street regarding trading transparency and regulation of the totally-out-of-control credit default swaps/derivatives industry, than Wall Street moves swiftly, 48 hours later, (see this morning: "Wall Street to Clear Client Credit Swaps by December") to head it off at the pass with their newly-announced "solution" to the problem.
Wall Street to Clear Client Credit Swaps by December
By Matthew Leising
June 2 (Bloomberg) -- Wall Street banks including JPMorgan Chase & Co., Goldman Sachs Group Inc. and UBS AG will for the first time offer hedge-fund customers protection by backing credit-default swap trades with clearinghouses by December.
The dealers also committed to report all trades that aren't cleared in the credit swap market to a trade repository by July 17; for interest-rate swap trades by Dec. 31; and for equity derivatives by July 31, 2010, the banks said in a letter sent today to the Federal Reserve Bank of New York.
--SNIP--
U.S. regulators are pushing for tighter regulation of the $592 trillion over-the-counter derivatives market, which includes credit-default swaps, to reduce risk to the financial system. Derivatives contributed to the failures last year of Lehman Brothers Holdings Inc. and American International Group Inc., and a broader seizure that caused more than $1.4 trillion in writedowns and credit losses.
Trades in the $29 trillion credit-default swap market are now cleared by ICE Trust, a clearinghouse owned by Intercontinental Exchange Inc. ICE Trust only clears trades made between its bank members and doesn't now allow for pension funds, hedge funds or other investors to guarantee their trades with banks.
Bold type is diarist's emphasis.
The article goes on to tell us the Depository Trust & Clearing Corporation--the entity that's been tasked with acting as a clearinghouse for all of this--is merely going to expand its current registry "to meet regulator demands for more transparency."
"In the period between October 2008 to June 2009, the OTC derivative market will have progressed from a state where there was no well-defined standard for reconciling portfolios to one where 70 percent of the outstanding transactions across all derivative asset classes are reconciled frequently," the banks said in their letter.
This is a far cry from what Morgenson reported in Monday's NY Times piece.
Main Street's problem, however unknown it may be to us (because this story really hasn't been widely circulated as I write this--I believe it was on Bloomberg for about an hour tonight), is: a.) Wall Street's solution has no transparency, whatsoever, since it'll be completely managed by the extremely private New York Branch of the Federal Reserve System, the folks that were supposed to be keeping an eye on these markets all along; b.) it's already received Treasury Secretary Geithner's tacit blessing; so, c.) it provides a complete copout--and no real assurance to the public that the same mistakes that got us into this mess won't be repeated going forward--for what would otherwise be a showdown between Congress and Wall Street on what many feel is the single biggest cause of this country's economic woes now (and, perhaps, going forward).
Then again, what else could we expect from a group that treats the legislative branch of this country as if they were little more than indentured slaves, put in place by a status quo for no other reason than to do Wall Street's bidding? I mean: damn! It's to the point where even our national legislators are just coming out and saying it--at first Illinois Senator Dick Durbin (D-IL), about a month ago (see: "Frankly, banks own the place"); and just over the past 48 hours, House Agricultural Committee Chair Collin Peterson (MN-07) reiterated this (see: "The banks run the place...").
Today we're being told: "Wall Street to Clear Client Credit Swaps by December." (See above.) But, just Monday, Morgenson told us there were two schools of thought with regard to the development of legislation to impose stricter controls over the industry:
"One camp, which includes legislative leaders, is pushing for trading on an open exchange -- much like stocks -- where value and structure are visible and easily determined. Another camp, led by the banks, prefers that some of the products be traded in privately managed clearinghouses, with less disclosure."
Treasury Secretary Geither is very much in favor of the Wall Street solution to this effort (privately managed clearinghouses with less disclosure).
Critics in both the financial world and Congress say relying on clearinghouses would be problematic. They also say Mr. Geithner's plan contains a major loophole, because little disclosure would be required for more complicated derivatives, like the type of customized, credit-default swaps that helped bring down A.I.G. A.I.G. sold insurance related to mortgage securities, essentially making a big bet that those mortgages would not default.
--SNIP--
"The banks want to go back to business as usual -- and then some. And they have a lot of audacity now that everyone has bailed them out," said Yra Harris, an independent commodities trader who was involved in an effort to regulate derivatives nine years ago. "But we have to begin with the premise that Wall Street doesn't want transparency, because more transparency means less immediate profits."
Bold type is diarist's emphasis.
But, today's story implies this is all a moot point. Done deal?!? Or, is this just a lame attempt by Wall Street, colluding with the Federal Reserve System to preempt Congress from imposing tight regulatory restraints on an industry that assumes it may write its own rules, just as it always has?
This morning, even Germany is ranting about the excessive power of the Federal Reserve here in the U.S.: "Germany Blasts Powers of the Fed."
Based upon today's Wall Street story, however, it would appear that little is changing except for some administrative procedures and the inclusion of some hedge funds and a few other entities (for all intents and purposes). No exchanges, which would provide much more transparency. Just one little obfuscated club with a clearinghouse, all comprised of the same entities which have benefitted from our government's largesse, all along.
So, I ask, what the hell just happened over the past 48 hours? Did I miss something? Or, has Wall Street just redefined the meaning of the term: "high-speed railroad?"
Using the same "clearinghouses" that have been in place all along sure looks like "business as usual" to me.
Again, what the hell's going on?