Excerpt
In its first detailed effort to overhaul financial regulations, the Obama administration on Wednesday sought new authority over the complex financial instruments, known as derivatives, that were a major cause of the financial crisis and have gone largely unregulated for decades.
The administration asked Congress to move quickly on legislation that would allow federal oversight of many kinds of exotic instruments, including credit-default swaps, the insurance contracts that caused the near-collapse of the American International Group.
The Treasury secretary, Timothy F. Geithner, said the measure should require swaps and other types of derivatives to be traded on exchanges or clearinghouses and backed by capital reserves, much like the capital cushions that banks must set aside in case a borrower defaults on a loan. Taken together, the rules would probably make it more expensive for issuers, dealers and buyers alike to participate in the derivatives markets.
The proposal will probably force many types of derivatives into the open, reducing the role of the so-called shadow banking system that has arisen around them.
“This financial crisis was caused in large part by significant gaps in the oversight of the markets,” Mr. Geithner said in a briefing. He said the proposal was intended to make the trading of derivatives more transparent and give regulators the ability to limit the amount of derivatives that any company can sell, or that any institution can hold.
The initiative was well received by senior Democrats in Congress with jurisdiction over the issue. The proposal had been expected, but some lawmakers, impatient with the pace of the new administration’s efforts, had begun moving ahead themselves.
Hinting at a lobbying campaign to come, Robert Pickel, the chief executive of the International Swaps and Derivatives Association, a trade group, said his organization “looked forward to working with policy makers to ensure these reforms help preserve the widespread availability of swaps and other important risk management tools.”
But some in the financial industry say that regulation is inevitable. “Nobody is in a ‘just say no’ mode,” said Steven A. Elmendorf, a former aide to the House Democratic leadership who represents several major financial institutions and groups. “Everybody understands that we’ve been through a financial crisis and that change has to happen. And the only question is how the change happens.”
The administration is seeking the repeal of major portions of the Commodity Futures Modernization Act, a law adopted in December 2000 that made sure that derivative instruments would remain largely unregulated.
The law came about after heavy lobbying from Wall Street and the financial industry, and was pushed hard by Democrats and Republicans alike. It was endorsed at the time by the Treasury secretary, Lawrence H. Summers, who is now President Obama’s top economic adviser.
At the time, the derivatives market was relatively small. But it soon exploded, and the face value of all derivatives contracts across the world — a measure that counts the value of a derivative’s underlying assets — outstanding at the end of last year totaled more than $680 trillion, according to the Bank for International Settlements in Switzerland. The market for credit-default swaps — a form of insurance that protects debtholders against default — stood around $38 trillion, according to the international swaps group. That represents the total amount of insurance that has been written on various kinds of debt, but the amount that would have to be paid out if the debt went into default is considerably less.
As the credit crisis has unfolded, trading in credit-default swaps has cooled, market participants said. The collapse of A.I.G. took a huge player out of the market and banks, hobbled by losses, have curbed their activities in the market. Still, derivatives trading desks have been profit centers at major banks recently.
The biggest banks and brokerage firms, including JPMorgan Chase, Citigroup and Goldman Sachs, as well as major insurers, are all major players in derivatives.
Derivatives are hard to value. They are virtually hidden from investors, analysts and regulators, even though they are one of Wall Street’s biggest profit engines. They do not trade openly on public exchanges, and financial services firms disclose few details about them. The new rules are meant to change most, but not all, of that opacity.
Now, lets see if the industry REALLY supports the change or just say they are but work behind the scenes to block it.
No comments:
Post a Comment