Regulations Alone Are Never Enough, But Here’s How They Can Easily Be Made Pointless
Courtesy of JESSE’S CAFÉ AMÉRICAIN
Mr. Obama’s speech at the Cooper Union today was remarkably unsatisfying. It seemed to be given from weakness, and almost obsequious as the American President politely asked his largest campaign contributors to please stop flouting the law, defrauding the people and their customers, and spending millions per day lobbying the Congress to buy changes in the reform legislation to provide them with the ‘right regulators’ of their choice and convenient loopholes to render it ineffective.
The reform making its way through the Congress is unlikely to be effective given the process in place, despite the political kabuki dancebeing conducted by the Congress and the Banks.
The solution is to put simple and effective regulations in the hand of stronger, independent, ad highly capable regulators to bear on the financial services industry, and to understand that the regulations must evolve with a dynamicly evolving business. The idea that you can erect some impregnable and unchanging Maginot line against bank fraud is laughable, a farce.
As William K. Black disclosed in his testimony the other day, the regulators always had the power to shut down the frauds, and to resolve the financial crisis without having to give away billions. They lacked the will, and the motivation.
You want to wipe that smirk off Lloyd Blankfein’s face? Nominate Eliot Spitzer or Elizabeth Warren to be the head of the SEC, or the CFTC, and provide them with a adequate budget and a staff of financial experts and a few experienced prosectors.
Even with strong regulations, unless you have capable and motivated regulators, there are always ways to evade the rules, especially if they are complex and provide exceptions. The simpler they are, the stronger the regulations will be, provided they are flexible enough to be amended and expanded efficiently to match the changing and dynamic nature of the industry that they are overseeing.
This is not that difficult, and these jokers are not that smart, although part of their con is to paint themselves as the smartest, the best, and practically unstoppable.
The root of the US financial crisis is always and everywhere regulatory capture, political cronyism, and fraud. It really is that simple.
Barack Obama should to listen to a speech by Nick Clegg of the UK Liberal Democratic Party to hear what a genuine reformer sounds like. Today he sounded like a servant, but not for the public.
Marketwatch
Meet the New Goldman Sachs Derivatives Business
By David Callaway
April 22, 2010"…So the version making its way to the Senate floor Wednesday included a host of exemptions for non-bank companies who use derivatives to hedge against quick movements in prices for resources they need. These include airlines, manufacturers, other trading corporations, and pension funds – entities like Enron, for example, or the Orange County, Ca., retirement fund – two infamous financial wizards.
So firms like Goldman, Morgan Stanley, or J.P. Morgan Chase Co. would be able to register as other entities – airlines, manufacturers, pension consultants — and continue to trade derivatives to their hearts content.
Sounds silly, until you realize that’s just what Goldman and a number of other banks did almost two decades ago to enable them to trade widely in commodities index futures. In 1981, Goldman got itself classified as a "hedger," such as a farmer or food producer, so it could trade commodities without fear of limits put on pure speculators.
Part of the fallout from that was the disastrous run-up in food and commodities prices we saw in 2009, caused by speculators, which finally forced the Commodities Futures Trading Commission to take a look at these special exemptions. See story on Goldman futures trading exemptions.
This is where the battle over the derivatives bill lies in the next several days, and where Wall Street will concentrate its efforts. The more exemptions granted; the larger the loopholes and trading opportunities. These are not stupid people, by the way.
Another provision would require the $60 trillion foreign exchange swaps industry to be overseen by the CFTC, which is the same regulator that earlier this week was considering whether traders could make markets in Hollywood movie futures, but neither of those ideas will fly – especially in foreign currency markets.
To make its derivatives regulation work, and have teeth, Congress and the Obama Administration must resist all exemptions on derivatives trading. They must instead focus on forging a global alliance in the G-20 this weekend in Washington to stand behind the creation of a transparent market in derivatives trading through clearing houses and exchanges.
Doing this would lead to cheaper trading for customers and make it easier for global regulators to supervise the creation of new products. Importantly, it would also allow the big banks to continue to participate in what is in fact a very lucrative and vital business for the global economy, not just to hedgers, but to those seeking loans to rebuild their companies, industries, or countries. Like it or not, banks are the primary lenders and they need to be allowed to do business.
Whether this in fact will happen in Washington, or whether Congress will once again descend into a chaos of partisan bickering and blind and reactionary rule making, is anybody’s guess. Goldman is almost certainly betting on both outcomes.
