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OTC Derivatives reform not going far enough...

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OTC Derivatives reform not going far enough... [#permalink]

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New post 25 Jun 2009, 11:07 ... 01970.html

"Obama's proposal calls for derivatives to be traded through "central clearinghouses," which would collect data about the market and require that buyers and sellers allocate enough money to cover any trades.

Non-standard derivatives would be exempt from much of this regulation. These are derivatives linked to highly complex investments, such as securities composed of mortgages and other kinds of debt. But Gensler and Schapiro said it would be important to be vigilant about policing this market."

Instead of just standardized derivatives, all derivatives need to be brought under regulation and be traded transparently. This main issues of non-transparency, lack of a central counterparty, and lack of regulation are at the root of the systemic financial crisis. If these derivatives are too complex, then they probably shouldn't exist in the first place.
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Re: OTC Derivatives reform not going far enough... [#permalink]

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New post 25 Jun 2009, 12:24
One man we should all be paying attention to is Paul Volcker: ... BbIcvSgrFs


"Derivatives Trading

Now, as Obama’s inside outsider, he’s trying to maintain his balance amid conflicting political agendas. In February, he complained to administration officials and friends about being kept away from policy discussions. While he’s happier now, he’s still worried that he won’t have enough impact on the regulatory reforms he cares about most, the friends say.

In May, Geithner announced plans to regulate derivatives trading, which would require most of it to move through a clearinghouse and, in theory, reduce the risk that a trader’s collapse could send shock waves through the market. While the proposal includes many of the suggestions Volcker laid out in a Jan. 15 report by the Group of 30 that he helped write, it doesn’t go all the way. Volcker chairs the board of the G-30, which includes former central bank chiefs and economic officials from around the world.

Volcker’s Suspicions

The Geithner plan allows contracts that can’t be standardized to be traded outside the central clearinghouse. Volcker wants to discourage that by imposing capital requirements on trading parties, people familiar with his thinking say. He also wants derivatives to be traded on exchanges, where investors can see prices for themselves, which would bring down profits for the dealers who act as intermediaries.

Geithner’s plan leaves the door open for more-onerous capital demands and a bigger role for exchanges. Wall Street banks, including JPMorgan Chase & Co. and Goldman Sachs, sent a letter to the New York Fed on June 2 supporting a clearinghouse.

Volcker has long been suspicious of financial products that most people can’t understand. One of his four grandchildren, Colin Zima, heard about it a lot when he studied financial engineering.

“He would constantly joke about me studying to be a crook,” says Zima, 25, who worked at UBS for a year before taking a job in 2007 as a statistician at Google Inc. in San Francisco.

The new job made his grandfather happier, he says.

‘Speculative Fever’

The former Fed chairman started worrying about derivatives and structured debt such as mortgage-backed bonds in the early 2000s, his grandson says. In a 2000 interview with the New York Times, Volcker said he couldn’t make sense of the financial innovation going on.

“You obviously have a kind of speculative fever,” he told the paper. “It’s a kind of casino. It’s all the rage, trading certificates that have no intrinsic value.”

In 2005, Volcker was worried about the housing bubble, the U.S.’s growing trade deficit and banks’ increased risk taking.

“Under the placid surface, there are disturbing trends,” Volcker wrote in the Washington Post. “Altogether the circumstances seem to me as dangerous and intractable as any I can remember, and I can remember quite a lot.”

Overstretched Fed

The Obama administration initially wanted to give the Fed a larger role, people close to the discussions say. Volcker was opposed, arguing that too much weight on the institution could threaten its independence in setting monetary policy.

“Do we want to make the Federal Reserve the chief regulator too?” Volcker asked during a Bloomberg TV interview on April 29. “Maybe that’s going a little too far.”

The administration has since shifted away from having a single regulator, instead giving the Fed a partial role in monitoring systemic risk, along with a council of regulators.

Volcker’s concern about an overstretched Fed has shaped the views of key congressmen, aides on Capitol Hill say. House Financial Services Committee Chairman Barney Frank echoed Volcker’s views on regulatory oversight on May 28, saying he opposed a single regulator.

“My own preference is for a dual-track regulation,” Frank said, referring to two separate channels of regulation that would focus on the health of the banks and the need to monitor for systemic risk as suggested by Volcker’s G-30 report.

‘Political Games’

The PERAB is taking a broad look at financial reforms, including whether banks that take deposits should be barred from engaging in high-risk trading, according to some members. While Volcker has strong views on that -- he thinks commercial banks should be prohibited from owning hedge funds or private equity units, people familiar with his thinking say -- he’s listening to others in the group.

“We’re an advisory board, so we can present different viewpoints at the end to the president,” says board member Wolf.

The biggest obstacle to Volcker’s reform agenda is Summers, Volcker’s friends say. While the president’s top economic adviser has softened his anti-regulatory stance from his days as Clinton’s Treasury secretary, it will be difficult for him to accept some of Volcker’s proposals, they say.

That hasn’t fazed Volcker.

“If he’s of a different view, I’m sure he’ll recognize the wisdom of my view sooner or later,” Volcker said in the April interview.

“Don’t rule Volcker out yet,” says Kavesh, his longtime friend. “Paul worked under five presidents before, and he knows how to play the political games. As events unfold, he’ll take on a more direct, stronger role.”
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Re: OTC Derivatives reform not going far enough... [#permalink]

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New post 25 Jun 2009, 20:25
The clearing house should have been the very first piece of reform. I'm glad its under discussion. A lot of madness could have been avoided if there were a clearing house and fewer OTCs floating around in the first place.
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Re: OTC Derivatives reform not going far enough... [#permalink]

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New post 10 Jul 2009, 11:07
This is a great debate. I can't stand CNBC, but sometimes they allow moments of sanity to pass the airwaves.

Tavakoli is an expert in her field...and she's been writing about the problems in structured finance well in advance of this crisis.

Santelli, as usual, is the only sane CNBC person...

I have to laugh when Kudlow says: "So write to your congressman!"

Here's a nice summary of this video, courtesy of Sliderontheblack (

Did you just see the debate about derivatives and
the Fed becoming sole market regulator?

Larry Kudlow was babbling about market nyphomania and french
kissing, while Janet Tavacoli was being an uncoopertive guest,
as she wouldn't let Melissa Francis keep feeding the viewers
her scripted talking points supporting the Fed.

And then they brought in Rick Santelli.

Here's the problem...

The Fed wants to allow the banks to use phony stress tests to
keep themselves and the market propped up. And they want to
allow the banks to keep trillions of dollars of toxic derivatives
(yes, trillions with a "T"), hidden in the dark.

Santelli came on and made the point that there could not be
any true market reform until these toxic derivatives were
brought out of the dark, and into the light of day on
regulated exchanges.

But that didn't fit Melissa Francis' talking points and twice
she sarcastically muttered - "thanks Rick for coming on and
solving all our problems."

You see, they don't want America to know the truth.

They want us to believe that the problem is so big, and so
complex that there are no simple solutions, and that only
the Fed, and a sole regulator is capable of leading America
out this economic crisis.

Melissa the mouthpiece didn't like Santelli's inconvenient
and simple truth about moving all the toxic paper into the
light of day and on to regulated exchanges... because that
would keep the Fed from picking winners and losers, and
gaming the markets.

Melissa's talking points want to convince you that the
disinfectant of the light of day is evil, and the darkness
of an un-audited Fed, and Enron style off balance sheet SIV's,
and unregulated derivatives is good.

Darkness good - light bad.

Unregulated good - regulated bad.

Talking points good - Santelli bad.

You see... if these trillions of dollars of derivatives
we're ever allowed to see the light of day, it would
expose the mega banks as being insolvent and bankrupt
beyond repair.

And most importantly... it would bring the real problem
of this economic crisis into the light of day.


They want to try to convince America that this is all their
fault because they bought too much house, too many SUV's,
too many Plasma TV's and too many X-Boxes.

It wasn't Phil Gramm, Chris Dodd, or Barney Frank's fault.

And it wasn't Hank Paulson, Robert Rubin, or Angelo Mozilo's

It's yours.

You the taxpayer.

It's YOUR fault.

And the only way they can loot the US Treasury and turn your
children and grandchildren into indentured servants, is to
keep you believing the big lie.

And you wondered why Sherman Skolnick called it the...
oil soaked, spy riddled, monopoly press?

Congratulations to Melissa Francis for surpassing Dennis Kneale
in becoming CNBC's "most useful idiot."
Re: OTC Derivatives reform not going far enough...   [#permalink] 10 Jul 2009, 11:07
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