The Bullsh_t Never Ends--Update On Swaps Legislation

Matthew Leising of Bloomberg has a terrific update on the continual battering and botching of true finance reform on how swaps are traded.  Or maybe I should say purposeful sabotage of reform on how swaps are traded.  Up until now there have been zero regulations on the way swaps are traded.  And if you look at special language put in the bill which passed the House in December, certain Congressmen in the House wish to keep it that way.  

Collin Peterson (chairman of the House Agricultural Committee) and Barney Frank (Chairman of the House Financial Services Committee) "indicated" they'll remove wording in the bill (eh, got caught with our hands in the cookie jar boys??) that allows swaps trading to be processed in such a way to keep prices private.  The legislation was touted (or promoted falsely) as a way to make derivatives trades more transparent.  "Transparent" here meaning public and out of the shadows.

The bill's sponsors (who would have you believe they don't know the wording of their own legislation) claim they hadn't intended to allow traders to use non-public clearing systems. Peterson was quoted in the Bloomberg article from an e-mail:

“To the extent clarification of that language is needed, that will be pursued during the conference committee process.”

Ever heard a sentence so vague and yet so full of bullshit at the same time???

Unregulated trading connected to the subprime mortgage market ended up costing American taxpayers $182.3 billion to save Lehman Brothers and AIG alone, not to mention billions more dollars spent on bailouts of dozens of other financial institutions, directly and indirectly saved from insolvency by the taxpayer.  Derivatives made solving the crisis much more difficult, due to the multiple links and counterparty risk.

Trades that don't have to be done on exchanges, are much more lucrative for investment banks.  You might ask "Why are they more lucrative??" Because when investors cannot obtain information on prices, the banks (or swaps dealers) can take advantage of the gap (or difference) between the price they pay to buy swaps, and the price they charge to sell them.  The difference is called the "bid-ask spread" and accounts for a huge amount of revenue for banks in the derivatives market.

The largest derivatives dealers (which includes Goldman Sachs, JPMorgan Chase, and Bank of America) made roughly $35 billion from unregulated derivatives through the 3rd quarter last year according to Federal Reserve records.

Matthew Leising's article also quotes a Finance Professor and I lift directly here:

“The banks obviously have a desire to maintain the status quo,” said Craig Pirrong, a finance professor at the University of Houston. Weak competition in derivatives markets and a lack of transparency help boost their earnings, he said. “Superior access to price information in a relatively opaque ‘search’ market can be quite profitable.”

Goldman Sachs, JPMorgan, and Bank of America all declined to comment on the legislation.  But you can bet they have lobbyists working quite actively in Collin Peterson's Agriculture Committee and lobbyists working very actively in Barney Frank's Financial Services Committee.

Bottom Line: The large investment banks and swaps dealers do not want registered exchanges or transparent prices for swaps/derivatives trading.  This adds a lot of systemic risk to the American financial system and was at the core of the crisis. If we don't have registered exchanges or some place where derivatives trades can be cleared and prices made public, we have a 99% chance of repeating the same crisis again.

Matthew Leising's article explains the rest of the details better than I can, I strongly encourage all to read it HERE.