With everything going on with Wall Street you may have missed a Reuters article by Charles Levinson that talked of hundreds of billions of dollars of trades by U.S. banks which went missing early last year.
Has the mystery of these disappearing derivatives been solved? Well, maybe.
It seems the trades had not really disappeared, they’d just been resettled, so to speak, thanks to a loophole that had been handed down in 2013 by the Commodity Futures Trading Commission( CFTC). Thanks to the changing of a few key words in swaps contracts, that loophole allowed for trades to be shifted to Europe where the regulations governing trades are by far more lenient than in the U.S., and largely outside of many of the restrictions mandated by Dodd-Frank.
This loophole impacted some of the most widely traded financial derivatives in the world — incidentally, some of the same instruments that helped bring down the economy in 2008 and which eventually led to government bailouts of the big banks involved in this roulette game.
While Congress passed legislation calling for regulations to inhibit this kind of gambling, the large banks fought back and won concessions. Even while the CFTC proceeded to draft new regulations to curtail this kind of trading, representatives of our largest five banks met with these same regulators more than 300 times. Ironically (said tongue in cheek), between 2010 and 2013, of the 50 CFTC employees who’d met with these banks 10 times or more, 25 plus of these staffers now work for the same banks or for the law firms and lobbyists who represent them (revolving door, anyone?).
It’s no surprise that this lobbying activity resulted in a ruling that somewhat excluded the U.S. banks overseas operations, putting them outside the jurisdiction of U.S. regulators. So the outcome was that U.S. banks shipped trades overseas. According to Reuters, by the end of 2014, “certain U.S. swap markets had seen 95% of their trading volume disappear in less than 2 years.”
Is this a problem? You better believe it.
The swaps may be booked abroad, yet the risks still fall on the big banks engaged in the activity. The banks themselves are not off the hook and should we have another recession, government bailouts — the taxpayer’s money — will once again come to the rescue. Enable once and you’re stuck when the next incident comes up.
Enabling becomes the expectation.
[tweetthis]Enabling banks has become the expectation. ~ @RichardMBowen #cftc #tbtf #wallstreet #doddfrank[/tweetthis]
This loophole leaves a huge risk danger zone. The U.S. derivatives market has outstanding contracts worth $220 trillion face value. Yes, that’s right, with the top five banks holding 92% of this $220 trillion. Many of these same products brought our TBTF banks and others to their knees in the last financial crisis!
After our 2008 debacle, Dodd-Frank was crafted, calling on regulators to put a stop to the ruthless financial gambling that led to the bailouts and recession. It instituted required rules governing more effective ways of reporting and record keeping tabs on risks to hopefully minimize them. And, as you may recall, Dodd-Frank also prohibited banks from funding risky derivatives with taxpayer guaranteed deposits … a restriction which was gutted by a Citigroup-written amendment to the 2014 year-end funding legislation.
In 2009, Gary Gensler was appointed chair of the CFTC. A former Goldman Sachs employee and later undersecretary of the U.S. Treasury, Gensler helped push through the 2000 law that banned all regulation of the derivatives market.
In 2009, as Congress was hard at work on the Dodd-Frank bill, Rep. Spencer Bacchus (R-AL) suggested an amendment that would keep banks’ overseas operations outside the new rules. Representative Barney Frank (D-MA) of the Dodd-Frank bill asked Gensler to craft a counterproposal. Gensler did and inserted 17 words into the 228 page amendment of the Dodd-Frank bill; words that were carefully crafted to leave some wiggle room. It read, if those activities “have a direct and significant connection with activities in or in effect on, commerce of the United States,” then the rules would apply. The passage supposedly gave the U.S. regulators worldwide reach over U.S. banks’ trading operations.
The fight began, marking one of the most acrid post-crisis regulatory battles since 2008. Thirteen global banks hired derivatives lawyer Edward J. Rosen, with the firm of Cleary Gottleib Steen & Hamilton, to fight the inclusion. The banks lobbied hard.
When Gensler left the CFTC, bank friendly Mark Wetjen, was appointed in his place. Wetjen was, by the way, not a proponent of Dodd-Frank. The wordsmithing and politics of the issues erupted into one of the biggest fights Dodd-Frank has inspired, to date.
And so a gap in the “new” CFTC policy, allowed banks to ask clients to waive their guarantees from swap contracts. Some clients did, some did not. By mid 2014, this had resulted in changes in hundreds of thousands of these contracts. The Securities Industry and Financial Markets Association, a D.C. bank lobbying group, actually issued its client banks talking points they could use to justify the de-guaranteed contracts and issues of trades, should they be questioned by regulators and lawmakers.
So, is this a mystery theatre play in progress? Seems so. Except once again the TBTF banks are the “producers“ and instigators blockading our regulations, subjugating rules and building momentum toward another financial breakdown.
[tweetthis]Has the mystery of these disappearing derivatives been solved? Maybe. ~ @RichardMBowen #doddfrank #tbtf #cftc[/tweetthis]
Related Posts
Senator Warren: Enough is Enough with “Too Big To Fail” Citigroup
Bank of America Finally Gets a Clean “Stress” Test — After 3 Attempts!
What Were the Major Causes of the 2008 Financial Crisis?
Richard Bowen is widely known as the Citigroup whistleblower. As Business Chief Underwriter for Citigroup during the housing bubble financial crisis meltdown, he repeatedly warned Citi executive management and the board about fraudulent behavior within the organization. The company certified poor mortgages as quality mortgages and sold them to Fannie Mae, Freddie Mac and other investors.
