Repost from Jesse’s Cafe…
“I have to think this train is probably going to leave the station soon and we need to focus our efforts on explaining the story as best we can. There were too many people involved in the deals — too many counterparties, too many lawyers and advisors, too many people from AIG — to keep a determined Congress from the information.” James P. Bergin, NY Fed, in an email to his Fed colleagues.
‘Though it is hard to divine much understanding from the unredacted filing, it has become clear that Goldman had more involvement than previously believed: In addition to the credit default swaps it bought from AIG, the filing shows that Goldman Sachs also originated many of the underlying assets that AIG and the New York Fed bought back from Société Générale.
The American people have the right to know how their tax dollars were spent and who benefited most from this back-door bailout,” said Kurt Bardella, spokesman for Issa. “Now that it’s public, let’s see if the sky really does fall as the New York Fed said it would to justify its coverup.”
Other lawmakers believed that the New York Fed was trying to hide its ties to Goldman Sachs.’ AIG Reveals the Story – CNN
“Wednesday’s hearing described a secretive group deploying billions of dollars to favored banks, operating with little oversight by the public or elected officials.
We’re talking about the Federal Reserve Bank of New York, whose role as the most influential part of the federal-reserve system — apart from the matter of AIG’s bailout — deserves further congressional scrutiny…
By pursuing this line of inquiry, the hearing revealed some of the inner workings of the New York Fed and the outsized role it plays in banking. This insight is especially valuable given that the New York Fed is a quasi-governmental institution that isn’t subject to citizen intrusions such as freedom of information requests, unlike the Federal Reserve
This impenetrability comes in handy since the bank is the preferred vehicle for many of the Fed’s bailout programs. It’s as though the New York Fed was a black-ops outfit for the nation’s central bank…
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.
The House of Representatives has begun the debate on the Wall Street Reform and Consumer Protection Act… (HR 4173)
The real devil lurking in the details is the regulation of derivatives…
The weeds of the competing legislative proposals are a little thick but the high level concept relates to where the derivatives trade gets done…
Will the trade get done in the light or in the dark?
Will the trade get done on a public exchange or alternative swap facility?
Or will it be done during a phone call between two big banks and then buried deep in an opaque trading book? Where it will lurk as a weapon of mass destruction as Warren Buffett would say
Derivatives trading must happen in the light…
These trades must be done publicly to provide stability in our financial system…
Remember the AIG darkness? Which almost melted down the global economy… it was really dark around all those AIG trades… dark as a graveyard.
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Here are the particular details where the devil is lurking… from Baseline Scenario:
Colin Peterson (D-MN), Chairman of the House Committee on Agriculture, along with Barney Frank, has added an amendment to the OTC Bill (opens large pdf). There are two relevant sentences for reformers from the long document. The first is on page 32:
(49) SWAP EXECUTION FACILITY.–The term ‘swap execution facility’ means a person or entity that facilitates the execution or trading of swaps between two persons through any means of interstate commerce, but which is not a designated contract market, including any electronic trade execution or voice brokerage facility.
This replaces other language in the original bill (opens even larger pdf), on page 546:
SEC. 5h. SWAP EXECUTION FACILITIES.
(A) No person may operate a swap execution facility unless the facility is registered under this section.
(B) The term ‘swap execution facility’ means an entity that facilitates the execution of swaps between two persons through any means of interstate commerce but which is not a designated contract market.
So notice any differences? First the definition of a swap execution facility has been expanded to include “a person” (different from the “or entity”). It’s also expanded to an “or trading” definition, and includes voice brokerage firms. So now we are moving from the definition of something that is a platform for swaps to be traded on to instead something that simply helps swaps get traded. This could, quite simply, be a telephone over which two people trade a derivative (with one person declaring himself to be the exchange?). Instead of changing the way business is done for reform it looks like it redefines reform as the way things are currently done, and just calls it a victory.
Now on page 89 of the amendment:
2) RULES FOR TRADING THROUGH THE FACILITY.–Not later than 1 year after the date of the enactment of the Derivative Markets transparency and Accountability Act of 2009, the Commission shall adopt rules to allow a swap to be traded through the facilities of a designated contract market or a swap execution facility. Such rules shall permit an intermediary, acting as principal or agent, to enter into or execute a swap, notwithstanding section 2(k), if the swap is executed, reported, recorded, or confirmed in accordance with the rules of the designated contract market or swap execution facility.
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To see the legislation and amendments here…
Here are all the amendments that are being debated on the floor:
The ‘manager’s amendment‘ is a kitchen-sink amendment that pulls in all the last minute deals (so you can actually see handwriting on the PDF). It is 242 pages long and that is where you are going to find a lot of important policy changes.