Doom News

Harold Bradley - who oversees almost $2 billion in assets as chief investment officer at the Kauffman Foundation - told the Reuters Global Exchanges and Trading Summit in New York that a cabal is preventing swap derivatives from being forced onto clearing exchanges:

There is no incentive from the moneyed interests in either Washington or New York to change it...

 

I
believe we are in a cabal. There are five or six players only who are
engaged and dominant in this marketplace and apparently they own the
regulatory apparatus. Everybody is afraid to regulate them.

Indeed, as I wrote last May:

In at least one area - one of the most important causes of the financial crisis - reform has already been defeated.

 

By way of background, the derivatives industry has volunteered (once again) to regulate itself.

 

As Newsweek noted April 10th, the big boys were using bailout money to aggressively lobby against the regulation of credit default swaps:

Major Wall Street players are digging in against fundamental changes.
And while it clearly wants to install serious supervision, the Obama
administration—along with other key authorities like the New York
Fed—appears willing to stand back while Wall Street resurrects much of
the ultracomplex global trading system that helped lead to the worst
financial collapse since the Depression.

 

At issue is whether trading in credit default swaps
and other derivatives—and the giant, too-big-to-fail firms that traded
them—will be allowed to dominate the financial landscape again once the
crisis passes. As things look now, that is likely to happen. And the
firms may soon be recapitalized and have a lot more sway in
Washington—all of it courtesy of their supporters in the Obama
administration...

 

The financial industry isn't leaving anything
to chance, however. One sign of a newly assertive Wall Street emerged
recently when a bevy of bailed-out firms, including Citigroup,
JPMorgan and Goldman Sachs, formed a new lobby calling itself the
Coalition for Business Finance Reform. Its goal: to stand against heavy
regulation of "over-the-counter" derivatives, in other words customized contracts that are traded off an exchange...

 

Geithner's
new rules would allow the over-the-counter market to boom again,
orchestrated by global giants that will continue to be "too big to
fail" (they may have to be rescued again someday, in other words). And
most of it will still occur largely out of sight of regulated
exchanges...

 

The old culture is reasserting itself with a
vengeance. All of which runs up against the advice now being dispensed
by many of the experts who were most prescient about the crash and its
causes—the outsiders, in other words, as opposed to the insiders who
are still running the show.

And today, Treasury gave the financial giants exactly what they wanted. As Bloomberg writes in an article entitled "Wall Street Derivatives Proposals Adopted in Treasury Overhaul ":

 

Wall
Street’s largest banks are getting what they want in the U.S.
Treasury’s plan to regulate over-the-counter derivatives by making all
market participants adhere to the same capital requirements...

 

“The
banks appear to wish to maintain the intra-dealer market and raise
barriers to new entrants to keep the OTC business as compartmentalized
as possible and to protect their profitable market conditions,” said Brad Hintz, an analyst at Sanford C. Bernstein & Co. in New York. “The Street’s lobbyists appear to be asking for a ‘club’ structure in OTC trading.”...

 

The
bank-written plan, titled “Outline of Potential OTC Derivatives
Legislative Proposal” and dated Feb. 13, said the systemic regulator
“shall promulgate rules” requiring “capital adequacy,” “regulatory and
market transparency” and “counterparty collateral requirements.”

 

Hintz
said Wall Street revenue from trading fixed-income, commodities and
currency swaps in the over-the-counter market may be reduced by 15
percent under the Treasury’s changes. “Limiting
potential competition” in the market “may not be an unreasonable
position to take” by the banks due to the potential loss of income, he
said...

 

Investment banks fought regulation of OTC
derivatives for more than a decade because the contracts provide a
significant portion of bank earnings.

Do you get it?

 

Instead of "blowing up or burning" over-the-counter CDS - as nobel economist Myron Scholes
urged - or making any other real changes which would help the economy
and the consumer, the rule changes are mainly a p.r. effort by the
derivatives industry itself (like the stress tests were a p.r stunt
by the banking industry.) The "changes" will do virtually everything
the derivatives industry asked for, including guaranteeing the big
banks' profits in selling CDS by keeping out smaller competitors.

Regulation of over the counter CDS has already failed.

And see this.