Lobbying battle heats up over derivatives
By Silla Brush | Posted: 07/10/09 06:43 PM [ET]
Treasury Secretary Timothy Geithner told Congress on Friday that the administration’s proposal to regulate financial derivatives would be comprehensive, but industry groups ramped up concerns and lawmakers continue to express wariness about aspects of the plan.
[from that article listed above – ]
Rep. Maxine Waters (D-Calif.) introduced legislation on Thursday that would go further than the administration proposal by banning all credit default swaps, one form of derivatives.
“Unless credit default swaps are banned entirely, I am concerned that the industry will find a way to loosen standards and widen exemptions for customized contracts and then we will be right back to where we are today, with capital markets hobbled and the financial system in need of additional government intervention,” said Waters.
Credit defaults swaps were a major factor in the meltdown at insurer AIG, which has since received $182.5 billion in bailout funds from the government.
Banks and a range of other non-financial firms are lobbying heavily (against) derivatives legislation, which is one part of the administration’s plan to revamp regulations for the wider financial system.
Four major Washington lobbying associations — Business Roundtable, U.S. Chamber of Commerce, National Association of Manufacturers and The Association of Food, Beverage and Consumer Products Companies — wrote in a letter on Friday that the proposal would increase the cost of business. “We urge you to prevent an anti-derivatives sentiment from translating into anti-business legislation,” the associations wrote.
A separate letter from 15 associations representing the electric power and natural gas industries raised concern with the mandatory clearing provision and the effort to move OTC derivatives onto public exchanges. The proposals, the associations said, would “significantly increase costs,” and “greatly reduce the ability of companies to find the customized derivative products they need to manage their risks.”
The Obama administration wants to bring clarity to what is effectively a dark market of financial instruments that are intended to hedge risk. Lawmakers and critics say those derivatives exacerbated the financial crisis and were the major factor in bringing insurance firm AIG to its knees.
The OTC market had a face value of roughly $400 trillion at the end of 2008, according to the International Swaps and Derivatives Association, and is a major part of international financial markets.
The administration proposal aims to regulate all over-the-counter derivatives, or those that are traded directly between buyer and seller, rather than through a third party. The administration also wants to see all standardized OTC derivatives pass through a central clearinghouse that could limit risk, as well as see many of them traded on a regulated exchange.
A major battle is brewing, however, over definitions. At root it boils down to how regulators and the market determine the difference between a standardized derivative and a customized derivative.
[From – ]
Lobbying battle heats up over derivatives
By Silla Brush
Posted: 07/10/09 06:43 PM [ET]
“greatly reduce the ability of companies to find the customized derivative products they need to manage their risks.” quote from above – made by lobbying groups against hedge fund, derivatives, credit default swap and other exotic financial instruments being subjected to transparency, registration and regulations.
My Note –
Isn’t it clear to these banks and financial gamblers that the derivatives and other toxic financial products they created did not, in fact, mitigate risk? Isn’t that part of the problem they created with them, is that it appeared to cover risks when in reality, those risks were even greater by the addition of products which were under-capitalized and unregulated in the event of a downturn in the markets or when defaults occurred?
The other thing, aside from the fact that we are paying tax money into banks to busy themselves spending that money on lobbyists to exert pressure on our legislators and the public against any form of regulation – is that the extra money that credit default swaps put into the system, doesn’t exist.
Part of what brought down our entire economy – which has been brought down whether it is called a Recession, or a Depression, or a downturn, or a contraction, or a “bubble” which popped – was the very introduction of a false currency that had not been accommodated in the real money supply that was monitored.
When a credit default swap is made, it backs the risks associated with loans and bonds against properties or whatever is involved – and occurs between two parties. If it stopped there, it might be a tool of some use provided that the liability or risk were properly capitalized with real money, but it doesn’t stop there. These transactions were used like liquid capital assets, like real money, as if they were tangible physical currencies which placed more money in the system than actually existed. It allowed them to be leveraged against money which didn’t exist on loans for real, tangible properties and moneys and assets against collateral that was essentially built on air.
The unfortunate thing that these credit default swaps and other credit derivatives have done, is to flood the monetary system with currencies and securities which are not real, are not accounted for, are not placed into the calculations of the overall currency system, and that are not in any way adjusted to show their real tangible value as the system’s status changes.
The credit derivatives and other “toxic assets” which were manufactured out of intellectual prowess and thin air, are traded, swapped, sold and used as collateral, as if they are real money in that they have been allowed to represent an actual unregulated, unsecured, unofficially-issued tangible currency. It is illegal and it is dangerous. It is massively wrong in the same way that printing counterfeit money and flooding the market with it is inherently undermining to the integrity of the overall monetary system and its true values established throughout its currencies, assets, issuances, bonds, shares, capital projects, physical properties, loan values and regulated securities.
When the original two players involved in creating a credit deal which insures against a bond or loan package going into default, are forced by law to register this transaction and to back it up with real money in the event of a pay-out, then it is an insurance policy to help mitigate the risk and spread it out between those parties. The two players in the deal have a vested interest in it and have something tangible to back up the play.
But, once they use that credit derivative as an asset to leverage against something else, trade it, swap it for cash, use it to hedge some other bet, or let of the liquid assets backing it – then, a voluntary conversion has been made of that credit derivative as if it were real currency – collusion has occurred if others were in on it and conversion in a creating and trading “counterfeit security” sense has taken place.
It has converted an intangible illegally constructed, unbacked security that was not issued by the US Treasury or Federal Reserve or International Monetary authorities into whatever tangible legal tender, bonds or assets that were traded for it. That is what integrally destroyed the fabric of our financial system and brought down the US and global economies which is what we have now.
Taxpayers are watching our money being used by bankers that we’ve bailed out, to fund high-priced lobbying groups who are being given millions of dollars to stop regulations on their gaming the situation with gambling and risky practices. For bankers that we’ve bailed out, stock brokerages that we rescued, financial institutions that we gave billions of dollars to keep in business, hedge fund managers, investment bankers and others who want to continue their gambling game without any oversight, besides buying their exotic sports cars, keeping their private airplanes, paying themselves extremely generous bonus packages – they’ve spent tons of money to pressure our legislators, specialists, economists, analysts, decision-makers, news organizations and the public. – no, they’ve done enough already.
– cricketdiane, 07-11,09
“The credit derivatives manufactured by banks and others in the backrooms of the fanatical gambling addicted financial industries caused the devaluation of every tangible asset and currency, undermined the integrity of our entire financial system, destroyed the foundations of our economy and brought down the global economic system. At what point do those players who caused this, actually stop tearing up the system to turn their own profits and stroke their own egos and start helping to correct it and make it right?” – my quote based on my own educated analysis of the stupidity of the situation.
– maybe part of the problem is that it is unreasonable to expect or to demand 350% profits in anything, including banking, insurance businesses, financial and institutional investments, commercial real estate, loans, bonds, credit default swaps, derivatives, hedge fund returns, manufacturing and in fact, anything else from crude oil to mining to chemicals for fertilizers.
Then, to bank on those exaggerated unreasonable profits as if they are real money and trade the intangible returns as a gamble for a safety net which also isn’t real and trade that for real money by betting on it, too – maybe that convoluted reasoning is an intrinsic part of the problem that has brought down corporations who have been strong, viable and vibrantly profitable enterprises before these sets of practices were instituted.
“It means we have a minimum of $400 Trillion Dollars in the financial system which doesn’t actually exist nor have any verifiable basis of value.” – my note