Derivatives Bill Violated, Leaves CFTC With the Bag, Fed Left in the Lurch

Something really ugly is going down behind the scenes right now, you'd do well to open your eyes and watch the bloodbath.

First point, regulating derivatives. As you already know, our friend and greasy bastard Larry Summers would prefer if he didn't have to deal with inconvenient regulatory goodness as it messes with his game. If he can stay awake long enough, he might even tell you why. (see also my October 18 Larry Summers Wants Banks to Do Him a Solid and Allow Themselves to be Regulated) The White House must be really busy going after "news" outlets like Fox News and just spread too thin to worry about stupid little things like exotic financial instruments that imploded the global economy.

Anyway. HuffPo tells us what those little asshats are up to:

Derivatives brought down the Wall Street investment banks Lehman Brothers and Bear Stearns and nearly caused insurance giant AIG to go belly up. The reason why they nearly brought down the entire financial system is because every major financial firm and bank were tied to them through derivatives deals. They were all interconnected. But there wasn't a single regulator looking at that. Rather, individual government regulators -- both state and federal -- were overseeing their own individual part of the pie, instead of the whole thing. Obama's plan is an attempt to change that.

But late Friday afternoon, the House Agriculture Committee quietly posted to its Web site a revised version of the Obama administration-proposed legislation. The Committee, which has jurisdiction over one of the two federal regulators of derivatives trading -- the Commodity Futures Trading Commission (CFTC) -- deleted the portion of Obama's bill that gives the Federal Reserve a say in those derivatives activities that pose a risk to the financial system. Specifically, the Fed would have been given the power to oversee new rules set up by the exchanges and clearinghouses where derivatives trading takes place. The previous version of the Agriculture committee's bill, released Oct. 9, included that passage. The current bill places that power solely in the hands of the CFTC.

*cough* You mean the Goldman rat-run CFTC (see also my August 20 CFTC Chair to Deutsche Bank: Goldman's Cojones are Larger than Yours)? Oh that's precious.

I have never promoted the Fed as ultimate regulator, of course, of derivatives or anything else but spreading duties across the various acronyms can't help anything either. What the hell are these people thinking?

Officials from the Federal Reserve also have lobbied for the added role, arguing that it's best suited to minimize destabilizing threats to the financial system.

"The [Federal Reserve] Board believes that all systemically critical firms should have a consolidated supervisor, as well as be subject to the oversight of any systemic regulator that might be created," said Patricia White, associate director of the Fed's division of research and statistics, in June during testimony before the U.S. Senate. "The scope of a firm's activities in the OTC derivatives market will likely be an important factor in making that assessment."

Fed Chairman Ben Bernanke echoed those remarks the next month during testimony before Barney Frank's Financial Services Committee.

"It is critical that systemically important systems and activities be subject to strong and consistent prudential standards designed to ensure the identification and sound management of credit, liquidity, and operational risks," Bernanke said. "The Federal Reserve also would expect to carefully monitor and address, either individually or in conjunction with other supervisors and regulators, the potential for additional spillover effects...For example, the failure of one firm may lead to deposit or liability runs at other firms that are seen by investors as similarly situated or that have exposures to such firms. In the recent financial crisis, exactly this sort of spillover resulted from the failure of Lehman Brothers, which led to heightened pressures on other investment banks."

Thus, in explaining why the Fed would need additional police power over things like derivatives trading, Bernanke brought up the failure of Lehman Brothers, the largest bankruptcy filing in U.S. history. At the time of its demise, the storied Wall Street investment bank listed more than $613 billion in debt.

But as it stands, the Fed won't be getting that power from the two derivatives bills currently snaking through congressional committees. Rather, it will be fragmented across an array of federal and private regulators -- just what the Obama administration warned against.

"snaking" eh, HuffPo? Nice choice of words.

Operation: Enduring Clusterfuck continues in full force and no one seems intent to stop it. Who will save us?! Certainly not these asshats.

Jr Deputy Accountant

Some say he’s half man half fish, others say he’s more of a seventy/thirty split. Either way he’s a fishy bastard.