(10 am. – promoted by ek hornbeck)
One of the regulation under the Dodd-Frank bill that was passed by Congress was regulating the derivatives by publicly trading them in exchanges. One of those derivatives, foreign exchange swaps is now on the verge of being exempted from regulation by none other than Wall St,’s best friend, Secretary of the Treasury, Timothy Geithner. It is a $4 trillion-a-day market that allows businesses to convert one currency to another currency. It also supports speculation, and facilitates the carry trade, in which investors borrow low-yielding currencies and lend high-yielding currencies, and which may lead to loss of competitiveness in some countries. It is one of the markets that the Federal Reserves spent trillions of tax dollars propping up during the financial crisis in 2008 because of its speculative practices and lack of regulation.
Now, from Robert Kuttner at The American Prospect, Timmy wants to “blow a hole in Dodd-Frank”
Treasury Secretary Timothy Geithner is close to a decision to exempt the $4 trillion-a-day foreign-currency market from key provisions of the Dodd-Frank Act requiring greater transparency in the trading of derivatives. In the horse-trading over the final conference version of that legislation last year, both Geithner and financial-industry executives lobbied extensively to give the Treasury secretary the right to create this loophole. As the practical reach of Dodd-Frank is defined by the executive branch, this will be the first major decision to signal whether regulators will act to strengthen or weaken the reforms….
Geithner has already made his own views clear. In testimony before the Senate Agricultural Committee in December 2009, he declared that the foreign-exchange market needed no special regulation. “The FX [foreign exchange] markets are different,” he said. “They are not really derivative in a sense, and they don’t present the same sort of risk, and there is an elaborate framework in place already to limit settlement risk.”
snip
However, previously confidential information recently made public by the Federal Reserve Board reveals that in the aftermath of the collapse of Lehman Brothers in September 2008, the Fed pumped in $5.4 trillion over a three-month period to keep the foreign-currency market from collapsing. The Fed’s peak injection of dollars on any one day occurred on Oct. 22, 2008, when it reached $823 billion, according to a Wall Street watchdog group’s, Better Markets, analysis of the Fed data release….
Sen. Maria Cantwell, one of the most effective advocates for strong derivatives regulation during the Dodd-Frank debates, says, “I can’t believe the first decision the administration would make to carry out Dodd-Frank would be an anti-transparency decision. The idea that the foreign-exchange markets are not at risk is preposterous — we now know that they required multitrillion-dollar bailouts. Anytime you have a lack of transparency, there is potential for abuse.”
snip
Abuse of derivatives was at the absolute center of the financial meltdown. The collateralized debt obligations that were built on pyramids of sketchy mortgages whose value collapsed were, of course, derivatives. The mortgages themselves had been converted into highly leveraged, artificial securities — the essence of a derivative. So were the credit-default swaps that took down American International Group. With a derivative, a tiny amount of capital can control a much larger financial bet, and until the Dodd-Frank reforms, the derivatives were constructed and traded privately, with no regulator scrutiny. If such bets go wrong, massive losses ensue. And in a generalized loss of confidence, even well-capitalized institutions fail to accept each other’s credits.
(all emphasis mine)
In other words, it is business as usual that got us into the financial mess were are now trying to dig out from under. Nice work, Barack
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