Around the time I posted my two latest diaries, early on Thursday [SEE: “Already In Deep Hot Water, JPMorgan Chase May Have Just Reached Its Boiling Point (Part I of II)” and “‘WhaleMu–JP Morgan’s Next Surprise?’ by Michael Olenick (Part II of II)”], little did I know that THIS absolute stunner appeared in the Wall Street Journal.
The story, and the facts related to it, truly speaks for itself. Here are excerpts from it from Thursday’s Wall Street Journal…
…J.P. Morgan's recent trading loss and the resulting Washington blather about tighter regulation have grabbed headlines. Little noticed is that on Tuesday Team Obama took its first formal steps toward putting taxpayers behind Wall Street derivatives trading—not behind banks that might make mistakes in derivatives markets, but behind the trading itself. Yes, the same crew that rails against the dangers of derivatives is quietly positioning these financial instruments directly above the taxpayer safety net.We’re reminded of the Dodd-Frank legislation, wherein: ”One part of the law forces much of the derivatives market into clearinghouses that stand behind every trade. Mr. Dodd's pet provision creates a mechanism for bailing out these clearinghouses when they run into trouble.”
…the law authorizes the Federal Reserve to provide "discount and borrowing privileges" to clearinghouses in emergencies. Traditionally the ability to borrow from the Fed's discount window was reserved for banks, but the new law made clear that a clearinghouse receiving assistance was not required to "be or become a bank or bank holding company." To get help, they only needed to be deemed "systemically important" by the new Financial Stability Oversight Council chaired by the Treasury Secretary.(Hot-link to Financial Stability Oversight Council is provided by diarist. Bold type is diarist’s emphasis.)
Last year regulators finalized rules for how they would use this new power. On Tuesday, they began using it. The Financial Stability Oversight Council secretly voted to proceed toward inducting several derivatives clearinghouses into the too-big-to-fail club. After further review, regulators will make final designations, probably later this year, and will announce publicly the names of institutions deemed systemically important.
We're told that the clearinghouses of Chicago's CME Group and Atlanta-based IntercontinentalExchange were voted systemic this week, and rumor has it that the council may even designate London-based LCH.Clearnet as critical to the U.S. financial system.
The piece continues on to report on remarks by former Goldman Sachs senior exec Gary Gensler, who’s now the Chairman of the Commodities Futures Trading Commission (CFTC). We’re told that: “…U.S. taxpayers thinking that they couldn't possibly be forced to stand behind [U.S. banks’] overseas derivatives trading will not be comforted…” by Chairman Gensler’s remarks from this past Monday, where he “…emphasized his determination to extend Dodd-Frank derivatives regulation to overseas markets when subsidiaries of U.S. firms are involved.”
For more on the Financial Stability Oversight Council, simply click on the hot-link to it, above.
If you wish to learn more about the potential implications of this action, I would strongly suggest a read of my two posts from Thursday, also linked above. IMHO, this is a stunning development that is directly-related to those two posts.
It is truly amazing that our government uses the convenient reality that our nation’s too-big-to-fail banks simply cannot be properly regulated because much of these banks’ activities occur globally, outside of our government’s jurisdiction. However, as of this week, it is now a part of “the record” that when it comes to backstopping Wall Street’s actions with U.S. taxpayer money, on an international basis, there’s no problem facilitating that ongoing travesty…whatsoever.
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