While the Dodd-Frank Wall Street reform bill did too little to address the problem of “too big to fail” banks, one of the big wins for reformers was the bill’s strong derivatives chapter which drags risky “over the counter” derivatives trades out of the shadows and into the light of day.
Reformers won strong provisions for clearing, margin and transparency, which will force the big banks to put real money behind their bets. Reformers also succeeded in securing mandatory position limits for key commodities that will protect consumers from price spikes caused by excessive speculation.
But now that the Wall Street reform bill is in the agency rulemaking process, bank lobbyists are back in droves, descending on regulators in an attempt to force giant loopholes into the law – loopholes worth billions of dollars for the big banks. The Los Angeles Times recently counted the noses and found that 90% of the time, regulators are meeting with the big financials firms. Surprise! Goldman Sachs and JP Morgan Chase topped the list.
Case in point: The big banks and the American Bankers Association are trying to redefine what constitutes “commercial risk” under the Dodd-Frank law. The ABA wants commercial risk "to be interpreted broadly enough to include financial risk for depository institutions.” According to Heather Slavkin of the AFL-CIO, "if the Commodities Futures Trading Commission (CFTC) were to adopt this definition, risky financial firms such as hedge funds and insurance companies could avoid business conduct and safety and soundness requirements that apply to major players in the derivatives market under Dodd-Frank” adding a substantial amount of risk to the system.
On a different front, the CFTC is working on developing “position limits” or caps on the number of speculative futures a trader can hold. The intent of Congress was to crack down on the energy and food commodity speculation that serves no productive purpose other than to line the pockets of traders and jack up prices on consumers.
Remember $4 a gallon we paid at the pump in 2008? It was due to crude oil speculation and it is happening again. “Wall street speculators are driving the current run-up in crude oil prices – cashing in before federal regulators have had a chance to protect households by tightening trading rules and establishing strong position limits,” says Tyson Slocum an energy expert for the consumer group Public Citizen. But the big traders are attempting to undermine the new law behind the scenes and refusing to cooperate with regulators, prompting Bart Chilton, a Commissioner for the CFTC, to express frustration with the industry.
At some federal agencies the big banks are gaining ground. Bowing to pressure from the big banks, Treasury Secretary Tim Geithner appears to be moving ahead with an exemption to the mandatory clearing and transparency requirements for a certain type of derivatives called foreign exchange derivatives (or ForEx swaps). $4 trillion dollars of Forex swaps are traded around the globe daily – a huge market and a disastrous loophole in Dodd–Frank]. Geithner appears to be repeating the mistake of his predecessor, Larry Summers, who famously fought to keep derivatives unregulated. He is worried about the ForEx trade going overseas. Well, I say if you can’t do your business in the light of day like other American firms, let me help you pack.
Senator Maria Cantwell, a leader in the derivatives fights, thinks Geithner is on the wrong path. “I urge Treasury not to create a potentially dangerous loophole. The security of our economy depends on foreign exchange derivatives coming under the same transparency and oversight provisions as the rest of the vast derivatives market,” Cantwell told Bloomberg.