Note: Obey (below) says I have this utterly wrong, and that I’m leading you astray. Also note that he’s a real doctor, and I am not. You can read Ben Bernanke’s speech in April, 2011 about the reasons to declare clearinghouses dealing in massive amounts of derivatives as ‘systemically important’ at the link.
The Wall Street Journal (behind a paywall) reported on May 23 that in a secret meeting the day before that as per one part of Dodd-Frank’s Title VII, those ‘transparent clearing houses’ that could be deemed ‘systemically important’, or are, in parlance: Too Big To Fail.
The language had been created initially by Chris Dodd in 2010, was inserted into the worse-than-useless (it now turns out) Dodd-Frank Pretend Regulation Bill, and was apparently left open to final tweaks as recently as this week.
Here’s how Mary Shapiro, head of the SEC claimed it would work, twelve cool rule proposals that would be designed to keep the OTC derivative trading clean, safe and transparent. But oh dear, when the SEC/CFTC were just finalizing the regs, the Big Banks swooped in, and..well, fiddlesticks; ya might think they own the place.
Cool. Obama had made great theater this month claiming that boy, howdy, would his team make sure that nothing like Jamie Dimon’s $X-billion debacle ever happen again, nossirree. We got yer backs, taxpayers! Vote fer us! We’re for the 99%!
From the WSJ via gota.org (most complete reprint I could find):
“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. [snip]
Specifically, 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.
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 (read the amount of derivatives trading they do and weep) and Atlanta-based Intercontinental Exchange (same here) 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. “
Oh, yes. And London/Paris-based Clearnet:
“…clears approximately 50% of the $348 trillion global interest rate swap market, and is the second largest clearer of bonds and repos in the world, providing services across 13 government markets.”
(Do read the more of the WSJ reprint for the cool history on CFTC Chairman Gary Gensler, who’s in the thick of all this derivatives ‘regulation’. Sad, sick, funny; your call.
Bloomberg News was far more sanguine about it all, at least on Monday before the meeting (suckers!).
Yeah; when Bloomberg News took receipt of the documents they’d demanded under FOIA, and discovered the Fed had secretly (bailed out) made emergency loans to foreign banks and multinationals to the tune of $1.2 trillion (cool graphics), no or low interest, no strings loans, you ranted. Now it’s the clearinghouse-moral hazard.
I thought: Oh, Barack Babee; you’re… killing me softly with your song…mmm…oooh…my goodness…aaah….aahhooooommmmm….