Financial Reform Is Being Gutted ... And Congress Might Not Even Realize It

George Washington's picture

As I have repeatedly pointed out, proposed derivatives legislation will not make things better:

  • A leading credit default swap expert (Satyajit Das) says that the new credit default swap regulations not only won't help stabilize the economy, they might actually help to destabilize it.
  • Senator Cantwell says that the new derivatives legislation is weaker than current regulation

Now, Mike Konzkal points out that the new derivatives bill may be completed gutted, and that Congress might not even realize it:

lobbyists snuck another major loophole into the OTC Derivatives bill?
This week the final touches are being put on Barney Frank’s financial
regulation bill – H.R. 4173 - “Wall Street Reform and Consumer
Protection Act of 2009.” One of the centerpieces of this reform is
Title III: Over-the-Counter Derivatives Markets Act. And one of the
goals of this reform would be to get as many derivatives as possible to
trade on exchanges...


For a while, reformers have been worried
about an “alternative swap execution facility.” This would be a way of
essentially allowing the current way things are done to be allowed to
count as an exchange. Fighting off this loophole was a battle from a month ago, and it had appeared to be won. Now many are worried that this language appears to have snuck back into the final bill now.


Colin Peterson (D-MN), Chairman of the House Committee on Agriculture, along with Barney Frank, has added an amendment to the OTC Bill (opens large pdf) ...


definition of a swap execution facility has been expanded to include “a
person” (different from the “or entity”). It’s also expanded to an “or
trading” definition, and includes voice brokerage firms. So now we are
moving from the definition of something that is a platform for swaps to
be traded on to instead something that simply helps swaps get traded. This could, quite simply, be a telephone over which two people trade a derivative (with one person declaring himself to be the exchange?). Instead of changing the way business is done for reform it looks like it redefines reform as the way things are currently done...


provision] here allows an intermediary to execute a swap, ignoring the
section 2(k) which is the meat of the reform, as long as the swap is
recorded somewhere. Now we already have, from above, that a swap
execution facility can be something other than the exchange. This is a rule that guts the regulation right out the door, and for no apparent benefit to reform.
Many of these alternative swap facilities will be owned by the banks,
so it won’t necessarily force the price transparency that has been
promised. To trust regulators to simply do the right thing is naive at
best when the ability to follow fixed rules is available.


what I’m hearing, it is possible Frank doesn’t even know that this
language, once in the bill as an amendment but removed, has snuck back
into his reform legislation
. Things are moving very quickly on
the hill right now, and this is scheduled to be wrapped up by tomorrow.
However this new language runs counter to the reforms Frank has
promised to deliver to the American people. Either this language needs
to be clarified before the bill is complete, or removed entirely.

As Ryan Grim notes,
many other aspects of the financial reform package - such as the
Consumer Financial Protection Agency - are being gutted as well. He
points out that the states' ability to rein in financial fraud is also
under attack.

Investment analyst and financial writer Yves Smith exhorts her readers to call Congress today to fight back against the lobbyists:

OK, sports fans, I know politics sucks, but it takes VERY LITTLE time
to call or e-mail your representative to give him or her a piece of
your mind. If you are not trying to be part of the solution, you are
part of the problem. And if you can take a few minutes to call, be sure
to call an in-state office, not the DC office. One big issue is a late
addition to the House financial reform bill which would further crimp
state’s rights (and recall it was the states, that led the charge on
dot-com abuses, auction rate securities, and now on alleged rating
agency fraud. This is an effort to gut the last channel willing to take
on the banksters). Even Reuters is putting the state of play in unusually stark terms:

army of lobbyists from banks and Wall Street have worked for months to
block, water down and delay the bill, which would threaten the profits
of many financial services firms.

A summary of all proposed amendments to the financial reform bill has been put together by the Committee on Rules.

The 242-page "manager’s amendment" - a
kitchen-sink amendment that pulls in all the last minute deals (so you can
actually see handwriting on the PDF) is where you can see a lot of
important policy changes.