Any plan that seeks to reverse the unregulated wild west that derivatives have existed in since 2000 must have a simple beginning: Repeal the Commodity Futures Modernization Act.

This ruinous and corrupt legislation, pushed through by the Bonnie & Clyde of deivatives, Enron Board member Wendy Gramm, and her astonishingly clueless ideologue husband, former Texas Senator (and current UBS member) Phil Gramm, lay at the heart of the current derivatives debacle.

After Greenspan, Gramm is the single most culpable individual in terms of damaging the global economy. He remains in deep denial as to the role he played.

Current legislative proposals fail to treat derivatives like all of other financial instruments. This is the very least any legislation should include.

In addition to the full repeal of CFMA, derivatives should be 1) Traded on exchanges ONLY; 2) counterr parties must be adequately capitalized and transparently disclosed; 3) appropriately reserved for; 4) Where derivatives are acting as insurance, state insurance commissions should have oversight and audit capability;

The current legislation does not do much of this:

“Legislation by Representative Barney Frank to tighten derivatives regulation contains an exemption that may let most financial firms escape new collateral and disclosure rules, the head of the Commodity Futures Trading Commission said.

The provision is among several loopholes in the draft legislation, officials of the CFTC and Securities and Exchange Commission said in testimony yesterday before the House Financial Services Committee headed by Frank.

The Massachusetts Democrat said he would “sharpen” his plan, intended to rein in the $592 trillion over-the-counter derivatives market. The committee has scheduled votes on it beginning Oct. 14. Frank predicted the legislation would pass the House by November and be signed into law by December.

A plan offered by the Obama administration would subject all swaps dealers and “major market participants” to new regulations for capital, business conduct, record-keeping and reporting. Frank’s version would exempt corporations from that definition if they use derivatives for “risk management” purposes.”

Its astounding this has not been resolved yet . . .

Source:
Derivatives Bill’s Loophole May Exempt Most Firms, Gensler Says
Tina Seeley and Dawn Kopecki
Bloomberg, Oct. 8 2009

http://www.bloomberg.com/apps/news?pid=20601087&sid=a7fAFtZGaGAk

Category: Bailouts, Derivatives, Regulation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

24 Responses to “How to Regulate Derivatives”

  1. Bruce in Tn says:

    http://www.ft.com/cms/s/0/6559c650-b36e-11de-ae8d-00144feab49a.html

    Bachmann voices ire at ‘Bail-out Nation’

    ….Apparently a new term has been added to the American lexicon….

  2. ToNYC says:

    Astounding as in a 007 plot, where you see Goldmen Finger and mini-me Timmy TT developed a coma-producing gas that produces paralytic chatter while the vault door remains open. The vampires of jpmChase and GS are covering CDS bets at par under the riot act while the body is bleeding to death. The audience is screaming for a tourniquet. You go, Barry!

  3. danm says:

    Its astounding this has not been resolved yet . . .
    ——————–
    Not really. Start putting rules and regualtion on this thing and you’ll surely force massive deleveraging… exactly what TPTB do not want.

  4. snapshot says:

    http://dealbook.blogs.nytimes.com/2009/10/07/capitol-hills-growing-divide-on-derivatives-rules/

    More here on the lobbying push…

    “Capitol Hill’s Growing Divide on Derivatives Rules” NYT – Dealbook

  5. hopeImwrong says:

    I kind of wish you could have delivered this message directly to congress. You would have to go easy on Phil in the capitol. As distasteful as that may be, the content (even without pointing the finger) has high value.

  6. gloppie says:

    Gramm needs to have a 2×4 applied to the back of his head.

  7. Moss says:

    Don’t expect Gramm to deny his denial. This guy is a fanatical conservative, rigid as a board.
    At least Greenspan admitted he was wrong about some of his beliefs.

  8. beaufou says:

    Derivatives are the AIDS of the financial world.

  9. crosey says:

    So many guilty parties. Hard to determine the ratio of guilt-by-intent from guilt-by-ignorance. Barney Frank and many still in power remain guilty. Pandering is a cancer, and there will always be someone of significant influence for sale.

    The cure may start at the legislative level, but it can only endure at the grass-roots level. Just because there is a loophole and it’s technically legal, does not mean that you have to do it. Naive of me? Perhaps. But I’m content doing what I do…and in the spirit of Ockham’s Razor.

  10. dougc says:

    Too big to regulate, more political power than the military/industrial complex or could it be too sick to treat? Looks like an incurable disease called lobbyist/legislature cancer, treatment with platitudes only delays the ultimate result.

  11. Goldilocksisableachblond says:

    “Frank’s version would exempt corporations from that definition if they use derivatives for “risk management” purposes.”

    In a recent poll of over 900 corporations , CFO magazine asked : ” To what strategic purpose do you use derivatives ?”.

    Results :

    “Risk Management ” : 99.9 %

    ” Duh , I don’t really know” : 0.1%

  12. Rikky says:

    i don’t think its too big to regulate. you have to put a spigot on the existing structure and develop a new model to allow a smoother transition. it could take 10-20 years to get this behemoth under control but the end game would be clear. unfortunately politics plays into the middle of any reform that could be meaningful so you get platitudes and posturing instead of real medicine.

  13. Darkness says:

    God love ya, Barry. (that’s what I think when I wake up to posts like this from you.)

  14. this: “In addition to the full repeal of CFMA, derivatives should be 1) Traded on exchanges ONLY; 2) counterr parties must be adequately capitalized and transparently disclosed; 3) appropriately reserved for; 4) Where derivatives are acting as insurance, state insurance commissions should have oversight and audit capability.” while a good, and workable, idea, to me, misses the point, of CFMA and OTC deriv.s, to begin with.

    OTC derivatives were the Tonic of the (mis-)Securitization Ginmill..
    before CFMA, virtually, noone wanted to, even, get close to deriv.s. It was a major hang-up.

  15. [...] “Current legislative proposals fail to treat derivatives like all of other financial instruments. This is the very least any legislation should include.”  (Big Picture) [...]

  16. [...] make the language very clear.” And Barry Ritholtz, over at The Big Picture, basically says: NO, NO, NO, YOU’RE DOING IT WRONG. Any plan that seeks to reverse the unregulated wild west that derivatives have existed in since [...]

  17. impermanence says:

    This is simply another chapter in the sad story of how using other people’s money to enrich oneself ends up in calamity.

  18. Brett Tibbitts says:

    Barry, I understand how Phil Gramm’s role in the passage of the Commodity Futures Modernization Act repulses you. But how about Larry Summers (Treasury Secretary at the time of passage of the Act and currently Obama’s top economic advisor) and President Bill Clinton? Larry Summers pushed just as hard as Gramm for passage of the Act and famously mused at the time how he had rarely seen such bipartisan support for a bill. And of course Bill Clinton signed the bill into law. Are Clinton and Summers just the dupes of Gramm in pushing for passage of the Act?

    ~~~

    BR: They come in for criticism in Bailout Nation for those exact reasons. But GBL and CFMA were Gramm sponsored idiocies . . .

  19. alfred e says:

    @BR: This is one of your best posts ever.

    This is a poison that will not go away until collapse, if then.

    We are doomed.

    I predict $5 gas in less than 1 year. Again. And then there’s natural gas. Essentials the a-holes are manipulating with free Fed money.

  20. macunix says:

    hey, i was inspired to register after reading “bailout nation”!

    most of the discussion i hear about regulation seems to be about re-inventing the wheel. this ignores the fact that we once had a system that worked pretty well, that incorporated the lessons of the great depression, and was systematically destroyed by the ideological far right. we don’t need a new system, we need our old American system that brought so much prosperity to the middle class. repeal the CFMA, what a fine idea! maybe bring back somethinng like Glass-Stegall, tool.

  21. FrancoisT says:

    Blarney Frank, in an interview with Dylan Ratigan, said that people shouldn’t make too much of early drafts of this legislation.

    http://www.huffingtonpost.com/2009/10/14/barney-frank-vows-to-shar_n_321254.html

    Right! And I’m the 3rd son of the 2nd wife of the Pope. What is obvious is that they publish early drafts as test balloons to see where the wind blows.

    And of course, quite a few smart people just won’t buy Frank’s pitiful attempts to justify the giant loopholes.

    http://tinyurl.com/yhqechh (From Naked Capitalism)

  22. FrancoisT says:

    “Its astounding this has not been resolved yet . . .”

    No Barry…what would be astonishing is that it would have been resolved already.

    I’m aware that government studies is not your cup of tea, but in the current environment where Washington is the econ big dawg, the fix ought to start in DC, not on Wall Street.

    3 things MUST happen, if we stand any chance of avoiding an even bigger crisis within the next decade or so:

    1) Repeal the money/free speech equivalence spawned by the Valeo v. Buckley 1976 decision by the Supreme Court. Consider this: If money is free speech, what is the absence of money? No speech, of course…which is exactly where ordinary people are in the US of 2009. No meaningful power of speech for them.

    2) The corollary of the above is a logical extension; public campaign financing only. That is, what gets into the hands of the politicians comes from public funds.

    3) Strip the corporations from their personhood status. This one is a doozy. but it ought to get done. Corporations are artificial entities, don’t vote and have no business (pun intended!) being considered legal persons.

    Only then, will Congress and the political parties stand a fighting chance of doing what’s right for the common good.

    BTW, we could also use 3rd parties. No one will make me believe that the immense complexity of the American social fabric is adequately reflected and served by a two parties system that with each passing day, look more and more like an extension of corporate America and special interests groups.

    Most people seem to think reforms to our system should be economic in nature. Well, that is just not the case, since most of the problems we have now come from the FIRE sector, which is essentially a creature of the politics.

  23. [...] So bankers, facing an onslaught of web-driven transparency and reduced profitability during the last decade along with an increasingly educated customer-base became anxious to change the laws in 2000 and are even more anxious to protect those changes now. [...]