From a speech by Gary Gensler, Chairman of the CFTC, at Fordham University College of Business Administration, January 27, 2010…
~~~ “… The 2008 financial crisis left us with many lessons and many challenges to tackle. From addressing institutions that are too big to fail to reforming mortgage underwriting and sales practices, it is essential that the Federal Government take significant steps to prevent the next crisis. This morning, I will focus on the need for comprehensive reform of over-the-counter (OTC) derivative markets and, specifically, on the need to regulate the banks and other firms that deal in derivatives…
… In the last three decades, the over-the-counter derivatives marketplace has grown up, but it remains unregulated. From total notional amounts of less than $1 trillion in the 1980s, the notional value of this market has ballooned to more than $300 trillion in the United States – that’s more than 20 times the size of the American economy; the contracts have become much more standardized; and rapid advances in technology – particularly in the last ten years – facilitate more efficient trading. While so much of this marketplace has changed significantly, the constant has been that it is still dealer-dominated.
BUENOS AIRES, Jan 8 (Reuters) – An Argentine judge blocked the president’s plan to use Central Bank reserves to pay public debt and ordered the bank chief’s reinstatement on Friday, deepening a dispute that has rattled financial markets.
Moments after a court ruled to reinstate former Central Bank President Martin Redrado, he returned to the bank, waving at television cameras. A day earlier, President Cristina Fernandez fired Redrado for opposing her debt plan.
Despite the court rulings, local media said an interim bank chief was taking steps to move $6.6 billion in foreign currency reserves to the treasury. “It’s like a science fiction movie,” a central bank employee told Reuters.
The conflict has highlighted persistent political instability in Latin America’s No. 3 economy just as Fernandez’s cash-strapped government seeks to charm investors and issue global bonds eight years after a massive default.
Argentine bonds, stocks and the peso closed down due to investor concerns over the strength of Argentina’s institutions ahead of a sovereign debt swap that is expected to launch later this month. [ID:nN08135180]
Fernandez urged opponents to let her govern and defended using part of the Central Bank’s $48 billion in reserves to service the nation’s debts.
“It’s much better to use the reserves than to take out loans with an interest rate of 15 or 14 percent. It’s common sense,” she said in a televised speech.
Opposition leaders have challenged her order for the central bank to transfer billions of dollars in foreign currency reserves to state coffers.
From the Financial Times and opinion piece by former US Treasury Secretary Nicholas Brady…
Refocus the regulatory debate on essentials
By Nicholas F. Brady
Published: January 4 2010 19:57 | Last updated: January 4 2010 19:57
There is an inexorable drive on both sides of the Atlantic to finalise new rules, regulations and laws to place the financial system on a sounder footing. But in their zeal to act, politicians and regulators are looking through the wrong end of the telescope. Too much attention is being paid to maintaining a status quo that allows banks to continue engaging in the full range of activities to which they have become accustomed – admittedly under a number of regulatory constraints – without dealing with the fundamental causes of today’s critical difficulties.
Policymakers are intent on announcing all manner of new capital requirements, leverage ratios, “living wills” and directives on risk management, while brushing aside warnings by both Mervyn King, the governor of the Bank of England, and former US Federal Reserve chairman Paul Volcker that our banking system is unsound. Mr King and Mr Volcker are not alone in their concern that we may now miss a unique opportunity to secure core reforms.
The Basel Committee on Banking Supervision – the key multilateral authority on setting financial rules – dumped an 88-page present on governments and banks just before Christmas and, true to form, its focus was on technical ratios designed to force banking stability. The US House of Representatives last month voted for regulatory reform legislation that is no better. The House fails to consider the distinction between things that are critical and things that are merely important. The same mistake seems likely from the European Union, which is in the throes of establishing three new regulatory authorities.
The safety and soundness of the financial system is indisputably essential; without it, we have nothing. The long history of financial collapses proves this point. While efficiency, creativity and credit availability are important, they cannot be allowed to trump safety and soundness.
Brilliant analysis from the Economist… this points the way for the new decade…
~~~ “THE air of immediate crisis is over. The monetary and fiscal doctors wheeled out the crash trolley and applied an electric shock to the global economy’s chest. The patient is recovering but is still rather too dependent on the drug of government support. The coming year will be dominated by a debate about how quickly that support can be taken away.
Two shocks have reduced the standard of living of Western economies. One is a terms-of-trade shift. Thanks mainly to China, the prices of the manufactured goods that rich countries sell have fallen; those of the commodities they buy have risen. The other is a “leverage” shock, in which the credit crisis has stopped people from borrowing to finance consumption.
In response to this second shock, governments have deliberately taken on the debts of the private sector. In most cases it has been assumed that governments have almost limitless capacity to assume such burdens. But you can see welfare states as national Ponzi schemes in which governments grant benefits and take on spending responsibilities, confident in the expectation that the next generation of citizens will pick up the bill.
Such promises have worked so far because of continued economic growth and rising populations. But with populations starting to fall in some countries, and the tax base shrinking in others, the strain is starting to show. The financial crisis has piled on further stress. Iceland, a tiny island state, was overwhelmed by the debts of its banks. Dubai has shown that the distinction between government debt and the debt of government-controlled entities can be a fuzzy one. Greece has been downgraded by two rating agencies, Fitch and Standard & Poor’s.
All this may lead to a turbulent year in the currency markets. The idea of the “law of volatility” is that you can control risks in some parts of the system but not in them all. A zero-interest-rate policy has supported risky assets, particularly equities, while quantitative easing, by allowing central banks to buy government bonds, has prevented massive fiscal deficits from pushing up bond yields.
More from Gary Jenkins, head of fixed income research at Evolution Securities, at the Financial Times in this video…
Mr. Moore precisely explains the kabuki play that we see being enacted between the central banks, the large global banks, the national governments and the people…
The Federal Reserve and other central banks have been working mightily to save the large, global money center banks… we call them the “too big to fail” banks… and Mr. Jenkins tell us how…
I disagree with him about the need to maintain these large banks… I think much of the fragility of our global financial system comes from the concentration of these large institutions… as Senator Sanders suggests it may well be time to “break up the banks“…
And Mr. Jenkins on sovereign debt risks… Financial Times video…
He warns that the recent market rally has fooled investors about underlying conditions which remain fragile after the recent crunch.
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