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Musings On The Treasury-Financial Complex
The Treasury-Financial Complex, by Cliff Asness and Aaron Brown, first appearing in the WSJ
The Dodd bill is perfectly designed to create the largest and most powerful crony system in history.
Whatever your views on financial reform—whether you want the
government to crack down on bankers or to disentangle itself from
financial markets—you should fear Sen. Chris Dodd's financial reform
bill. In 1,300-some pages, all it really does is legislate power to the
government for fixes to be named later. It does this by using terms
that are either totally undefined or defined in breathtaking
generality.
This is a politically
understandable solution. But it sweeps aside more than two centuries of
accumulated wisdom: that checks and balances are essential to markets,
and that rules must be known in advance.
Here's
one example: In the bill, a "swap" is defined as "any contract or
transaction that has financial, economic or commercial consequence
involving purchase, sale, payment or delivery with any contingent
clause." We challenge lawmakers to think of any contract or transaction
that doesn't meet that definition—from buying detergent with a
money-back guarantee to getting a rain-check at the car wash. If you
maintain a "substantial" net position in swaps, or if your failure to
perform under your swaps could cause "significant" losses, you are
considered a "major swap participant." And you really don't want to be
one considering how you'll be regulated.
"Substantial" and
"significant" are never defined. The bill does not say whether they are
to be measured relative to the global economy, or the financial
positions of you and your counterparty, or for that matter to the
average humidity of a mid-summer afternoon in Cleveland. All of this is
to be named later.
The bill also requires "major swap
participants" to forfeit privacy and freedom. They are required to
register and "to report and furnish to the Commission such information
pertaining to . . . [their] business as the Commission may require."
The Commission "may prescribe rules applicable to . . . major swap
participants" without significant limitation. No one has to notify you
in advance and you're supposed to figure out for yourself which rules
apply to you. Guessing incorrectly could land you in prison.
The
issue of "major swap participants" is one example in a bill that is
filled with terms and clauses so ambiguous as to allow virtually any
government action.
Our company, AQR Capital Management, trades swaps. We are already
registered with the SEC and have no objection to providing information
to regulators. We support anything to make the swap market more
transparent and safer, because that helps both our business and the
country. So we don't have any qualms about a bill intended to do that.
What we have a problem with is that the bill is drafted so it can do
anything.
True, if this bill is enacted we doubt that federal
agents will nab you if you accept a rain check from the car wash
without registering. Regulators will restrict information requests and
rules to things obviously related to financial trading. So, except for
a few constitutional scruples, what's the harm with giving regulators
this blank check?
Regulators will likely start off reasonably.
But soon they'll be pressured to investigate all unpopular financial
events, using their unlimited power to demand information. And because
they have unlimited power to set rules they will be able to outlaw
practices as they see fit. This will encourage anyone who loses money
for any reason to use political pressure to get redress.
Regulatory
staff will be working constantly with private-sector counterparts.
People who play ball with regulators can count on favors and subsidies
for themselves and barriers for their competitors and enemies.
This
will be a two-way capture. Regulated institutions will get fat on
government-legislated profit, and regulators will look good by getting
private firms to throw money at any problem that bothers Congress.
People will move back and forth between the private and regulatory
sectors.
The Dodd bill is perfectly designed to create the
largest and most powerful crony system in history. It's not that the
people, regulator or regulated, are personally corrupt. It's that the
system will itself select for, reward and enforce corruption.
No
financial professional will be able to turn down a "request" for a
campaign contribution, and all financial institutions will hire former
staffers as advisers or directors. No regulator can afford to
antagonize a potential future employer. Regulators themselves must
kowtow to Congress, which can use them for under-the-table subsidies to
favored groups. None of this is new to politics, of course, but the
scale and lack of defined powers are.
Reforms should be packaged
into simple laws that do not require enormous discretion to administer.
Good ones work best this way, and bad ones have limited ability to do
harm and can be repealed. Instead, the Treasury-financial complex that
the Dodd bill creates will be as expensive and hard to kill as the
military-industrial complex President Eisenhower advised us to fear.
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I thought we already had the largest and most powerful crony system in history. What the hell do you think a perfect trading quarter represents? Do we need a new reality show called "Bankers gone wild" for the people around the world to acknowedge how bad this is?
The Fall of Rome all over again.
Also from Eisenhower...
Another factor in maintaining balance involves the element of time. As we peer into society's future, we -- you and I, and our government -- must avoid the impulse to live only for today, plundering, for our own ease and convenience, the precious resources of tomorrow. We cannot mortgage the material assets of our grandchildren without risking the loss also of their political and spiritual heritage. We want democracy to survive for all generations to come, not to become the insolvent phantom of tomorrow.
All democracies become oligarchies eventually, which is why this experiment was founded as a republic in the first place.
The U.S. had been living under a de-facto oligarchy for decades before Eisenhower was even elected.
Good, I can't wait to see how our Govt. will use this. Just something else to shove up our A**. Can I at least get a reach around this time?
idk, if you add the reach around it might be considered a "swap"....hmmm.
Lots of bitching and moaning. Not that I disagree with Mr. Asness, its just that the government has its hand in everyone's pie. No news there. We are headed for lower standards of living and a systemic failure.
That was my impression as well, Cursive... Cliff Asness is a whiner with a fairly narrow agenda.
Government intervention has dealt a very crummy hand to the taxpayer, and it clearly appears that the well paid dealer (banks) need to suck more down. I sure wish I could go 63 for 63 in trading profits.
Yep... the major story the MSM won't tell tell the world is that our standard of living is ALREADY being taken away from us. What we are heading for is something more acute, I'm afraid.
American people are too stupid to understand the grave consequences of a runaway government. They are too eager to get something for nothing even if there are nothing more than empty promises.
As for the major US political parties, they are both terribly corrupt and intellectually bankrupt.
Just look at the US Supreme Court: 6 catholics and 3 Jews. Nobody at the US Supreme Court represents the majority of American people (protestants), their interests, their views and their values. We, the USA, became a fucking colony of the international Jewish banking elite.
Strangely, I don't really think religion has much to do with it.
I love it that in the richest country in the world, with the highest standard of living (to this point) the populace generally refers to each other as "stupid sheeple". If I'm not the stupid sheeple, then you must be . . .
The American people are far from stupid. The American people are watching with great interest and dread. The American people understand that at some point, they may have to take up arms against their own government and fellow countrymen. The American people don't want that because the American people consider themselves to be peaceful, law-abiding, problem-solving people. The American people are hoping that their elected officials will do the right thing.
But, when the shtf, you may be very surprised to discover just how clever and determined the "stupid" American "sheeple" can be. Time will tell.
That's sortof the definition of sheeple right there.
Where Are The Cops?
http://rawstory.com/rs/2010/0513/bankers-jailed-sued-iceland-seeks-culpr...
I don't believe anyone should be surprised by this. The system is falling apart, and everyone knew that as the event horizon approaches that the flailing about and wild spasms would get worse and worse. I expect that we'll see some really stunning legislation come during the zero hour of the implosion...and this is appalling but not nearly as bad as I expect.
Problem is there's nothing to be done. They won't listen and they don't live in an environment that looks beyond more than a day perhaps even the hour, so having a grasp of what this will mean ten years or to the next generations is not on their radar and never has been. The problems in the system cannot be undone without a complete collapse, there's no way to repair the damage in time, and fixing it is not in the interests of the politicians...until it is, which will be way too late.
"Oh, the humanity!"
Truly, humanz can be counted on to serve their own interests first -- and politicians are humanz. That circumstances escalating beyond hope of control have given these humanz the power to cause great suffering around the globe is infinitely regrettable.
Just what would you expect from one of the largest cronies in the world. I've been trying to vote this douche-bag out of office for the last 25 years.
I'm wondering if we won't see Dodd rewarded for his years of service with a cushy, high-paying position somewhere. When it comes to crack-licking subservience to the "financial industry," few can compete with Chris Dodd. (Google "friends of Angelo" if you don't believe me.) He wasn't even in the "revolving door" of banks and regulators, he simply waded out into the flow of money and stayed there (in the Senate since 1980). History will remember Dodd as one of the principal midwives of the financial Frankenstein now sitting up on the gurney.
I don't totally agree with this. The bill sucks, but not for this reason. He states, "This will encourage anyone who loses money for any reason to use political pressure to get redress."
So what. We need that and needed that the past ten years. I'd rather risk dumb intervention to have authorized broad intervention for the past 5 years.
This argument defends banks.
Perhaps this bill is just designed to NOT pass, as it has enough in it for everyone to dislike.
No... one way or another, it will pass.
This is not the type of "legacy" anyone should endorse. But we're talking about one of the most corrupt politicians on the planet.
I hope he enjoys his retirement in Belize.
Forget Treasury, it's the Central-Investment-Commercial-Bank Complex that needs tending to. This article defends it. If politicians don't have the power who does.
Pick your poison.
Lack of regulations got us here.
Now, we're gonna bicker about the broad power of the regulators?
If that's what we were bickering about in 2008, this wouldn't have happened.
"Lack of regulations" is sortof a misnomer...the financial industry has lots of regulations. What is lacking, is enforcement of existing laws against fraud. But mainly what we have is a government that is complicit in, and has encouraged, the financial industry's takeover of the economy. The Federal Reserve's (quasi-government) quantitative easing, for example, is basically free money for the banks and Treasury, at the expense of the middle class via taxation and inflation.
The balance of power has shifted towards the banks, but it never would have happened without the help of the Federal Reserve or something like it.
Interesting. Only problem is that I can't actually find the quoted definition of a swap in the bill. Perhaps I am looking at an old copy - can anyone point me to a link that includes that language?
Section 711 of the bill adopts the definition for swap and a number of other terms from the preexisting defs. in the Commodity Exchange Act.
OK, I read sec. 711 and the definitions section of the CEA. It seems like this language is from the EXCLUSIONS section of the CEA. That means it describes things not covered by this act. It does not seem to be the definition of a swap in the bill, unless the version before the Senate has been changed recently.
If true, this frustrates me. I dislike how much of our discussion process is dominated by incorrect assertions. It is easy enough to find things to dislike in the bill without making things up.
For a great many reasons, I can't stand the bill, so don't interpret this as coming to its defense. But I think there's no cause for concern in the issue you're raising.
The bill doesn't need its own definition, because ultimately, the relevant portions won't be a stand-alone document. Once the bill is signed into to law, these portions will dictate changes made to the CEA. Once those changes are implemented, the portion of the CEA that provides regulatory exclusions for swap agreements will go away. In its place (more or less) will be provisions that require clearing of most swap agreements. At least in theory, at that point, it will be unimportant whether the bill defined swap agreement, because the CEA will define it.
Of course, Congress screws up these types of things all the time, so it wouldn't be surprising to learn that one section of the bill defers to the definition of swap agreement in section x of the CEA and another seciton of the bill deletes section x altogether.
Here's the history on this definition, for what it's worth.
The bill defines "swap agreement" in terms somewhat narrower than quoted in the column (although still broader than most people would recognize as a financial swap). Originally you came under the power of the Commission if you were a "major swap MARKET participant," and "swap market" was defined by regular trading in "swap agreements."
A concern was raised that this definition would not cover AIG's contracts. Although they were clearly "swap agreements" as defined in the bill, they were not traded in any market. After a lot of back-and-forth, the decision was made to drop "swap agreement" and "swap market" from the bill (although the definitions remain). That left the only definition of "swap" as the one used for the purpose of defining amendments to the CEA.
The definition in the CEA was never meant to define swaps. It was meant to prevent the CTFC from regulating anything that was not on a specific list. Therefore, it defines "swap" as essentially everything (the definition quoted in the column) EXCEPT for a list of things the CTFC was allowed to regulate. It was an exclusionary definition, meant to exclude everything not listed rather than specify what was included.
It's quite possibly true that a court would narrow the definition of "swap" for the purpose of defining "major swap participant," but it's also possible that it wouldn't. Even if it did, there's no standard legal definition that it could substitute. So an executive option compensation contract, an option on an oil lease or a contract with choice of currency could all be determined to be "swaps" for the purpose of the bill; and even things less like financial swaps. Moreover, a court would be too late for redress in many cases.
This is a remarkably sloppy bill. The only parts that are clear are the ones dividing powers between the SEC and the CFTC, which read more like a peace treaty than legislation. "Swaps" and "major swap participant" are not the worst of it. Most of the problems result from rushed drafting with lots of different constituencies and no clear plan. But the swaps examples, and some others, I think are deliberate. All the changes in the bill since its first version have been to broaden or remove definitions. At least some of the people writing it were only worried that someone might slip through the regulatory rules, not that the regulators might over-reach or act unfairly, or that well-intentioned people might get punished ex post facto. The bill is imbued with the sense of "everything is forbidden, unless expressly permitted," instead of "everything is permitted, unless expressly forbidden."