Amazing, there is a serious lack of courage to take on financial oligarchy and the corporate oligarchy. First, we hear that they are already watering down the legislation for the Consumer Financial Protection Agency. Now comes word that there is a proposal for a huge loophole in the derivatives bill:
Legislation by Representative Barney Frank to tighten derivatives regulation contains an exemption that may let most financial firms escape new collateral and disclosure rules, the head of the Commodity Futures Trading Commission said.
So, is this going to be one of those political exercises that says look we did something for show with no substance?
This a very brief summary of what is on the table:
A plan offered by the Obama administration would subject all swaps dealers and “major market participants” to new regulations for capital, business conduct, record-keeping and reporting. Frank’s version would exempt corporations from that definition if they use derivatives for “risk management” purposes.
Risk management is a pretty broad term. Gary Gensler, chairman of the Commodities Futures Trading Commission said of Frank's proposal:
As just about all swaps could be defined as being used for risk management purposes, we’re concerned that unintentionally the category of ‘major swap participant’ could have been narrowed so significantly, or even to a null set,....Major hedge funds” may be excluded from oversight, as may the mortgage-finance companies Fannie Mae and Freddie Mac “because of course the government-supported enterprises use swaps for risk management purposes. "Risk Management" exclusion should be eliminated
No, surprise guess who loves Frank's proposal. Business groups such as National Association of Manufacturers and the Securities Industry and Financial Markets Association. Oh, yes, and those Corporate Democrats that love big corporate money.
Any loopholes to the derivatives bill will only serve to render it ineffective. Corporations and financial conglomerates are great at exploiting loopholes. Don't believe the hype about how the "sky is falling" and poor Cargill won't be able to hedge its risk in commodities prices. Bullshit, they don't want nothing to hinder their upside such as a cash margin requirement but what about the systemic risks of the OTC market - well Cargill would prefer that taxpayers assume that risk. Fu*k them!
UPDATE: This is from Financial Times Editorial:
The problem is not just that any loophole will be used to expand the activities the regulation is meant to target – although that is a serious risk. (Cargill, the food company, did not assuage this concern: its congressional testimony about price hedges it offers to bakeries nicely illustrated its side business in swaps dealing.)
It is also that the reason why non-financials might face higher costs by being included in the new rules is precisely the reason for so including them. Costly margin requirements indicate they buy derivatives that not only insure against the market moving against them but can put them at risk of having to pay out in the opposite case. That they find such contracts cheaper than paying upfront for insurance and enjoying windfalls in favourable conditions suggests precisely that the systemic risks of the OTC market and the investment banks that participate in it are still borne by others, namely taxpayers.