Swiss Cheese and Wall Street Reform
Wednesday, 16 February 2011 22:20
Last July, the Dodd-Frank Wall Street reform bill passed Congress and became law. While the bill falls short in many areas, a great deal of progress was made in clamping down on shadow banking and off-book derivatives trading.
Reckless over-the-counter derivatives trading played a critical role in turning the collapse of the U.S. housing bubble into a global economic catastrophe. In the Wall Street reform bill, reformers succeeded in dragging this opaque market into the light of day. Reformers fought hard to make sure that the new rules covered 90-plus percent of the $650 trillion dollar derivatives market. By law, these trades now must be done in the light of day, on an open exchange, with real time pricing and volume information, capital requirements and margin for trades. Forcing big traders put real money behind their bets brings a large measure of stability to the system and provides an important layer of protection for taxpayers.
Now big traders are trying to rewrite Dodd-Frank during the rulemaking process. Specifically, they are attempting to punch large loopholes in the law that would allow them to pursue business as usual.
The "loophole du jour" involves the arcane topic of derivatives end-users. Legitimate end-users are folks like family farmers and airlines that use derivatives to hedge against future price changes. Dodd-Frank allows a narrow group of small traders and end-users to avoid some of the requirements of the bill. Now a whole bunch of giant firms, such as big oil companies and giant agriculture broker dealers, are trying to jump on the end-user exemption because they want to continue their risky practices and don't want to put up hard money to back their bets. Lackies of the [http://dealbook.nytimes.com/2011/02/14/vanishing-act-advisers-seek-distance-from-a-report/ U.S. Chamber of Commerce] released a study this week, alleging that the new end-user requirements would cost America 130,000 jobs -- neglecting to point out that the old way of doing things cost America 8 million lost jobs.
For reformers the bottom line is - who will backstop the financial system? Big financial firms or the American public? Heather Slavkin of the AFL-CIO and Americans for Financial Reform says it "We don't need to have big traders squeak through these narrow exemptions that were created to allow small businesses a little flexibility."
If the big traders are allowed to rewrite the bill behind the scenes, a series of loopholes could leave Dodd-Frank looking a bit more like Swiss cheese than a comprehensive coverage of the derivatives market. The CFTC is accepting comments on the end-user issue until February 22nd. U.S. financial stability impacts the whole world. You do not have to be a citizen or a lobbyist to have your voice heard. Send an email to Gary Gensler,the head of the CFTC today, saying no loopholes in Dodd-Frank!
Mary Bottari is the Director of the Center's Real Economy Project and the Editor of the BanksterUSA site for bank busting activists. She is an experienced policy wonk and she previously served as a Senior Analyst for the Washington, D.C.-based consumer group Public Citizen in its Global Trade Watch division.