October 2009, Significant House Bill Passed by Mass Rep. Barney Frank's Financail Services Committee Allowing Many Loopholes and Exemptions

Posted by Joniwalker at Sunday, October 25, 2009
Major Exemption & Loophole: so called "End Users" and privately run Clearing Houses which will definitely be welcome by Wall Street to undermine the governing authority of regulators.

It is like Barney asks his cat to keep an eye on a fish for his dinner.
He painted pitch black instead of Transparency.
This stinky bill must be rewritten.

Articles related to this bill below.


Michael Hirsh

Too Hard to Understand

'Too Big to Fail' is one problem. But Barney Frank's loophole-filled derivatives bill has created another.

Oct 16, 2009
 
 
Of all the startling revelations to come out of the financial crash, perhaps the most astonishing was this: no CEO of a major Wall Street firm seemed to understand what his own traders were doing with derivatives. As we know, just about every Wall Street firm and bank had a derivatives time bomb ticking in an off-balance-sheet closet at the heart of the building. When these bombs all blew up one after another—credit default swaps! Liquidity puts! CDOs squared!—the top executives in their corner offices were as surprised as anyone. (Click here to follow Michael Hirsh)

Wall Street can't govern itself. We know that now. So you might think that the authorities in Washington would tell the Wall Street lobby where to stick it and insist on a lot more clarity when it comes to trading in derivatives, which until now has been almost entirely unencumbered by government. That appeared to be what the Obama administration was asking for last June when it demanded that all standardized over-the-counter derivatives be traded on an open and supervised exchange, with the Securities and Exchange Commission and the Commodity Futures Trading Commission as the sole judges of what is standardized. That way authorities would know most of what was being traded and could make sure the major players weren't getting in over their heads. But thanks to weeks of intense pressure from Wall Street banks and their customers in corporate America, the bill that was approved on Thursday by Rep. Barney Frank's Financial Services Committee is riddled with exceptions and loopholes, many critics say. If it becomes law, Wall Street's finest could be driving truckloads of new derivatives products through those loopholes for years to come.
Frank disputes that. "This isn't finished yet, so it's irresponsible to talk about loopholes," says his spokesman, Steve Adamske, who notes that the House Agriculture Committee will soon address some of these concerns with its own bill. But Frank is considered the key player, and it is significant that among the toughest critics of his committee's bill is Gary Gensler, the chairman of the Commodity Futures Trading Commission. Gensler was a pro-deregulation guy in the '90s who has gotten some serious religion this time around, and he's turned out to be a far more aggressive advocate of derivatives regulation than even the Obama administration. Gensler pushed Frank's committee to drop some exemptions that would have allowed pretty much anybody to avoid trading on exchanges if they could claim vaguely that they were hedging risk. "Gensler was very helpful," says Adamske.
Gensler praised the final bill as "historic progress," but he said "substantive challenges remain." The reason? He wouldn't elaborate, but a senior regulatory official familiar with Gensler's thinking says he's worried that the broad exemption for "end-users" of derivatives in the bill—intended to excuse nonfinancial companies that use derivatives to hedge exchange-rate or interest-rate risk—is still a "big regulatory gap." It is a loophole, in other words, that may let many other players avoid regulation, including hedge funds, private-equity funds and other financial firms. ("We have tightened it up somewhat," says Adamske, adding that Frank is requiring "reporting" of all trades.) Gensler is also concerned that all foreign-exchange trades as well as dealings on overseas exchanges will be exempted—it was dealings in forex trading, for example, that sank Long Term Capital Management in 1998—and that the CFTC will not have enough authority over exchanges and clearinghouses, for example, to set margin requirements. And he's worried about a provision that allows privately run clearinghouses dominated by Wall Street to change rules or contracts without CFTC review, undermining the authority of government regulators.
Corporate customers of Wall Street have been, in large part, pushing for such exemptions. But they should think hard about this. Yes, they want to avoid the margin requirements for derivatives that mean they have to put up capital on an exchange. But one of the reasons Wall Street is back to making record profits—and awarding itself record bonuses—is because of all the proprietary trading it does in derivatives and structured products off exchange. Huge profits are why the banking industry resisted all efforts in the '90s to "standardize" derivatives and allow them to be traded on an exchange. For the banks, the more custom-made and out of sight the derivative, the harder it is for investors to figure out its fair value and real risk—and the easier for the banks to charge a large "spread" and make a profit. Guess who was coming out on the bad end of those deals? Their customers.
The failure to push standardized derivatives onto exchanges was also why the ratings agencies got away with such bad and fraudulent ratings of subprime-mortgage-backed securities products: there was no way to check what they were doing. "The spreads in exchange trading are a tiny fraction of what they are customized products," says Barbara Roper of the Consumer Federation of America. "The requirement for exchange trading has the potential to really lower costs." Gensler agrees.
The reason is simple capitalism. Open, competitive markets mean lower prices. Rigged markets—what we have now—means someone makes out like a bandit. That someone continues to be Wall Street, which came very close to blowing itself and the rest of us up late last year and is now settling back into its old comfy profit margins. And that, at least, should be fairly easy to understand.
© 2009
EDITORIAL

The State of Financial Reform

Published: October 24, 2009

A Step Forward on Pay


It sounded good when the Treasury’s pay czar, Kenneth Feinberg, announced that top executives at Citigroup, Bank of America and the other five institutions surviving at taxpayers’ expense would see their compensation packages cut in half this year and their cash salaries reduced by 90 percent.
If you read the fine print you will discover that these reductions apply only to the remaining two months of 2009. Mr. Feinberg might be equally tightfisted when he sets pay for all of 2010 — he should be — but there is no guarantee. And as soon as any of these institutions pay the government back, they will be free of the constraints.
Mr. Feinberg’s job was always fated to be a sideshow. Far more important are the proposed guidelines that the Federal Reserve has come up with to align the risks taken and the rewards earned by executives, traders and loan offers at the nation’s 28 biggest banks.
Fed officials get the basic idea, that bankers’ compensation must be structured in a way that makes them think twice before they place bets that could lead their institutions (and the rest of us) over the cliff again. Their guidelines unveiled last week are a good start. But we fear they may still give banks too much leeway.
The Fed says it has also begun a review of current payment practices at the 28 banks and will veto payment structures it does not like. It must be ready to impose more specific restrictions if bankers game the system.
The Fed has not put any caps on pay. It is concerned only with how wages and bonuses can be structured to encourage bankers not to take excessive risks. It has offered a menu of suggestions.
It suggests that if two traders generated the same amount of profit, the one who took more chances should be paid less. It suggests that big chunks of bankers’ remuneration could be paid out over time — to keep more skin in the game. And if a banker’s investments were to go sour and lose money a few years down the road, some of the remuneration should be clawed back.
These are all sound ideas. But they are only guidelines — not rules. For example, the Fed expresses concern that golden parachutes could also lead to risky behavior, but it does not ban them or say how they should be used. And while some European countries are drafting regulations to ensure that 40 to 60 percent of executive bonuses for top bankers are paid out over several years, the Fed only suggests that these kinds of deferrals might be an appropriate tool.
The Fed insists that there can be no one-size-fits-all rules for more than two dozen highly complex banks with different business strategies. That may well be true. Fed officials say that as their review progresses, they may identify some egregious practices to ban outright or salutary formulas to adopt.
We still worry about leaving all of these critical details up to the banks — even with a promise from the Fed to be more vigilant. During the last several decades, banks have been given far too much room to write their own rules. The economic disaster around us is the result.

Too Little Regulation for Derivatives


The Obama administration and Congress have vowed to regulate derivatives, the complex and often highly speculative financial instruments that were at the heart of the meltdown. Two House committees have approved legislation, but — after heavy lobbying from the banking industry and corporate America— both versions are weak and unlikely to prevent another fiasco.
Right now, many derivative deals are executed as private one-on-one contracts, outside the view of the public or regulators. This lack of transparency — about participants, prices and volumes — proved disastrous. In the bailout of American International Group, tens of billions of taxpayer dollars went to pay the world’s biggest banks for derivative bets gone spectacularly wrong.
The bills require that many derivatives be traded on public exchanges, but then carve out far too many exceptions. One huge loophole would exempt derivatives from exchange trading for corporations that use them to hedge operational risks, say, an airline that wants to lock in fuel prices. The supposed logic is that corporate derivative users did not cause the crisis.



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Sunday, October 25, 2009

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