By BEN PROTESS
9:33
p.m. | Updated
Under
pressure from Wall Street lobbyists, federal regulators have agreed to soften a
rule intended to rein in the banking industry’s domination of a risky market.
The changes to the rule, which will be
announced on Thursday, could effectively empower a few big banks to continue
controlling the derivatives market, a main culprit in the financial crisis.
The
$700 trillion market for derivatives — contracts that derive their value from
an underlying asset like a bond or an interest rate — allow companies to either
speculate in the markets or protect against risk.
It is a
lucrative business that, until now, has operated in the shadows of Wall Street
rather than in the light of public exchanges. Just five banks hold more than 90
percent of all derivatives contracts.
Yet
allowing such a large and important market to operate as a private club came
under fire in 2008. Derivatives contracts pushed the insurance giant American International Group to the brink
of collapse before it was rescued by the government.
In the
aftermath of the crisis, regulators initially planned to force asset managers
like Vanguard and Pimco to contact at least five banks when seeking a price for
a derivatives contract, a requirement intended to bolster competition among the
banks. Now, according to officials briefed on the matter, the Commodity Futures Trading Commission has
agreed to lower the standard to two banks.
About
15 months from now, the officials said, the standard will automatically rise to
three banks. And under the trading commission’s new rule, wide swaths of
derivatives trading must shift from privately negotiated deals to regulated
trading platforms that resemble exchanges.
But
critics worry that the banks gained enough flexibility under the plan that it
hews too closely to the “precrisis status.”
“The
rule is really on the edge of returning to the old, opaque way of doing
business,” said Marcus Stanley, the policy director of Americans for Financial
Reform, a group that supports new rules for Wall Street.
Making
such decisions on regulatory standards is a product of the Dodd-Frank Act of
2010, which mandated that the agencies write hundreds of new rules. Most of
that effort is now complete at the trading commission. But across several
agencies, nearly two-thirds of the rules are unfinished, including some major
measures like the Volcker Rule, which seeks to prevent banks
from trading with their own money.
The
deal over derivatives was forged from wrangling at the five-person commission,
which was sharply divided. Gary Gensler, the agency’s Democratic
chairman, championed the stricter proposal. But he met opposition from the
Republican members on the commission, as well as Mark Wetjen, a Democratic
commissioner who has sided with Wall Street on other rules.
Mr.
Wetjen argued that five banks was an arbitrary requirement, according to the
officials briefed on the matter. He also noted that the agency would not
prevent companies from seeking additional price quotes. Other regulators have
proposed weaker standards.
Mr.
Gensler, eager to rein in derivatives trading but lacking an elusive third
vote, accepted the deal. By his reckoning, the compromise was better than no
rule at all.
In an
interview on Wednesday, Mr. Gensler said that, even with the compromise, the
rule will still push private derivatives trading onto regulated trading
platforms, much like stock trading. He also argued that the agency plans to
adopt two other rules on Thursday that will subject large swaths of trades to
regulatory scrutiny.
“No
longer will this be a closed, dark market,” Mr. Gensler said. “I think what
we’re planning to do tomorrow fulfills the Congressional mandate and the
president’s commitment.”
Yet the
deal comes at an awkward time for the agency. Mr. Gensler, who was embraced by
consumer advocates but scorned by some on Wall Street, is expected to leave the
agency later this year now that his term has technically ended.
In
preliminary talks about filling the spot, the White House is expected to
consider Mr. Wetjen, a former aide to the Senate majority leader, Harry Reid. The administration, according
to people briefed on the matter, is also looking at an outsider as a potential
successor: Amanda Renteria, a former Goldman Sachs employee and Senate aide.
The
prospect of someone other than Mr. Gensler completing the rules provided some
momentum for the compromise, officials say. The officials also noted that Mr.
Gensler had set a June 30 deadline for completing the plan.
The
White House declined to comment. Mr. Gensler, who has not said whether he will
seek a second term at the agency, declined to discuss his plans on Wednesday.
While
the regulator defended the derivatives rule, consumer advocates say the agency
gave up too much ground. To some, the compromise illustrated the financial
industry’s continued influence in Washington.
“The
banks have all these ways to reverse the rules behind the scenes,” Mr. Stanley
said.
The
compromise also alarmed Bart Chilton, a Democratic member of the agency who has
called for greater competition in the derivatives market. Still, Mr. Chilton
signaled a willingness to vote for the rule.
“At the
end of the day, we need a rule and that may mean some have to hold their
noses,” he said.
The
push for competition follows concerns that a handful of select banks — JPMorgan Chase, Citigroup, Bank of America, Morgan Stanley and Goldman Sachs — control
the market for derivatives contracts.
That
grip, regulators and advocacy groups say, empowers those banks to overcharge
some asset managers and companies that buy derivatives. It also raises concerns
about the safety of the banks, some of which nearly toppled in 2008.
“It’s
important to remember that the Wall Street oligopoly brought us the financial
crisis,” said Dennis Kelleher, a former Senate aide that now runs Better
Markets, an advocacy group critical of Wall Street.
With
that history in mind, Congress inserted into Dodd-Frank a provision that forces
derivatives trading onto regulated trading platforms. The platforms, known as
swap execution facilities, were expected to open a window into the secretive
world of derivatives trading. But Congress left it to Mr. Gensler’s agency to
explain how they would actually work.
There
was a time when Mr. Gensler envisioned the strictest rule possible. In 2010, he
pushed a plan that could, in essence, make all bids for derivatives contracts
public. Facing complaints, the agency instead proposed a plan that would
require at least five banks to quote a price for all derivatives contracts
passing through a swap execution facility.
But
even that plan prompted a full-court press from Wall Street lobbyists. Banks
and other groups that opposed the plan held more than 80 meetings with agency
officials over the last three years, an analysis of meeting records shows.
Goldman Sachs attended 19 meetings; the Securities Industry and Financial
Markets Association, Wall Street’s main lobbying group, was there for 11.
The
banks also benefited from some unlikely allies, including large asset managers
that buy derivatives contracts. While money managers may seem like natural
supporters of Mr. Gensler’s plan — and some in fact are — the industry’s
largest players already receive significant discounts from select banks,
providing them an incentive to oppose Mr. Gensler’s plan.
The
companies cautioned that, because Mr. Gensler’s plan would involve a broader
universe of banks, it could cause leaks of private trading positions. The plan,
the companies said, would not necessarily benefit the asset managers.
“If
someone told me I needed to shop five different places for a pair of jeans, I
don’t see how that would help me,” said Gabriel D. Rosenberg, a lawyer at Davis
Polk, which represents Sifma and the banks.
The
banks and asset managers also warned that many derivatives contracts are traded
too infrequently to even generate attention from five banks.
Some
regulators dispute that point. They point to the industry’s own data, which shows
that 85 percent of derivatives trading in a recent 10-day span occurred in four
products that are arguably quite liquid. (Each traded more than 500 times.)
As
such, according to officials briefed on the matter, Mr. Chilton proposed a plan
to require quotes to be submitted to at least five banks for the most liquid
contracts. Under his plan, contracts that were less liquid would still be
subject to at least two.
Mr.
Wetjen, who saw the effort as too complicated, continued to favor the two-bank
plan. While the requirement jumps to three banks in 15 months, the agency might
also have to produce a study that could undermine that broader standard.
In an
interview, Mr. Wetjen explained that he was seeking to grant more flexibility
to the markets. “If flexibility means it’s more beneficial to the banks, so be
it,” he said. “But it also means it’s more flexible to all market participants
and the marketplace as a whole.”
Some
consumer advocates have raised broader concerns about Mr. Wetjen, who once
advocated a broader exemption to part of a derivatives rule. They also
complained that Mr. Wetjen has split with Mr. Gensler on aspects of plan to
apply Dodd-Frank to banks trading overseas. He has, however, voted with Mr.
Gensler on every rule, unlike any of the other commissioners.
Mr.
Wetjen also noted that his actions often upset the banks. On only a few issues,
he happened to agree with them.
“I’m
not driven by who wages the argument,” he said. “It’s about what policy makes
sense,” he said.
*
PROBABLY
THE ONLY TRUTH OBAMA EVER TOLD THE AMERICAN PEOPLE WAS THAT HE WAS “NOT HERE TO
PUNISH BANKS!”… NOPE, AND HE NEVER HAS. THEIR CRIMES, LOOTING AND PROFITS HAVE
SOARED UNDER OBAMA.
YOU WOULD
NOT HAVE FOUND OBAMA’S DOJ GOING AFTER OBAMA’S PALS AT JP MORGAN. HOLDER IS TOO
BUSY HISPANDERING FOR LA RAZA, SUING AMERICAN STATES AND SABOTAGING OUR LAWS
AND BORDERS SO THE OBAMANATION CAN BUILD HIS LA RAZA PARTY BASE of ILLEGALS.
“Records show
that four out of Obama's top five contributors are employees of financial
industry giants - Goldman Sachs ($571,330), UBS AG ($364,806), JPMorgan Chase
($362,207) and Citigroup ($358,054).”
OBAMA’S OLD PALS J.P.MORGAN STILL FUCKING OVER CONSUMERS… IT’S LIKE OLD
TIMES FOR THE BANKSTERS!
Headline:
California lawsuit alleges illegal collection practices by JPMorgan Chase
*
CRONY KING
OBAMA: CURL: The Obamas live the 1 percent life
CRONY CAPITALISM… predicated on keeping wages depressed to
third world levels for his billionaire donors!
Obamanomics: How Barack Obama Is Bankrupting You and
Enriching His Wall Street Friends, Corporate Lobbyists, and Union Bosses…and
Muslim Dictators
OBAMA’S HAREM OF CORRUPT BANKSTERS… DO A GOOGLE
FOR HOW MANY ENDED UP WORKING IN HIS ADMINISTRATION.
“Records show that four out of
Obama's top five contributors are employees of financial industry giants -
Goldman Sachs ($571,330), UBS AG ($364,806), JPMorgan Chase ($362,207) and
Citigroup ($358,054).”
OBAMA, THE BANKSTER OWNED LA RAZA
DEM
“The response of the administration was to rush to the
defense of the banks. Even before coming to power, Obama expressed his
unconditional support for the bailouts, which he subsequently expanded. He
assembled an administration dominated by the interests of finance capital,
symbolized by economic adviser Lawrence Summers and Treasury Secretary Timothy
Geithner.”
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