Posts Tagged ‘credit-default swaps’

House Republicans Want to Water Down Dodd-Frank Financial Reforms

Monday, March 7th, 2011

Republican congressmen searching for sizeable spending cuts are targeting Wall Street’s regulators over a plan to slash millions from the budgets of several vital agencies. They are setting their sights on the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC).  The workload of both agencies is expected to increase significantly as the Dodd-Frank financial reform law is implemented. House Republicans want to slash the CFTC’s funding by $56.8 million – nearly 33 percent of the agency’s entire budget — over the next seven months.  The SEC’s funding would be cut by $25 million over the same time.

CFTC Chairman Gary Gensler said he would have no option but to reduce his staff from 680 to fewer than 440 if the cuts are approved.  “We’d have to have significant curtailment of our staff and resources,” Gensler said.  “We would not be able to police…or ensure transparent markets in futures or swaps.”  Under Dodd-Frank, the CFTC regulates the multi-trillion dollar derivatives market that includes over-the-counter products called credit default swaps.  The story is similar at the SEC, which is working to augment its enforcement of Dodd-Frank.  “It (budget cuts) will have a very real effect on the SEC’s ability, not just with respect to Dodd-Frank implementation, but also with respect to our core mission,” SEC Chairman Mary Schapiro said in testimony before Congress.

Leading the charge in Congress is Representative Randy Neugebauer, chairman of the House Financial Services Subcommittee on Oversight and Investigations. One of Neugebauer’s top priorities is assuring that regulators are not “overreaching” and moving too quickly with their new authorities under Dodd-Frank.  Neugebauer expressed concern about whether regulators are adequately performing cost-benefit analyses on every rule in Dodd-Frank, a process required under federal rule-making procedures.  He expects to call SEC Chairman Schapiro and CFTC Chairman Gensler back to testify about the issue, especially since he believes that Gensler gave him “vague” responses about cost-benefit analyses on derivatives rules.  Neugebauer said another of his major priorities will be to rein in the powers of the Consumer Financial Protection Bureau, an entity created under Dodd-Frank.  The Texas congressman wants to move the bureau to the Treasury Department and out of the Federal Reserve’s control.

Another congressional Republican makes this point.  “When the House and Senate passed the Dodd-Frank Act, supporters continually purported that small financial institutions, like many I represent, were exempt,” Representative Shelley Moore Capito, (R-WV) said.  “As the provisions of Dodd-Frank are going through the rule making process, I am starting to hear concerns from small institutions about the unintended consequences that could adversely affect them.”

One point of contention with the Republicans is the orderly liquidation provision that authorizes regulators to seize large financial institutions that are about to fail and dismantle them in a way that is less disruptive than either taxpayer bailouts or bankruptcy.

“People are saying we won’t have the guts” to invoke orderly liquidation, acknowledged Democratic Representative Barney Frank, (D-MA), who co-sponsored the legislation with now-retired Senator Christopher Dodd (D-CT).  “Well, we had the guts with regard to the TARP to get the money back.  We got it back,” he said, referencing the $700-billion Troubled Asset Relief Program (TARP) that bailed out Wall Street firms and which has been largely repaid.  “I don’t have any question that we’re going to go through with it,” Frank said.

Dodd-Frank Bill Collides Head On With Deficit Realities

Wednesday, February 9th, 2011

Implementation of the historic Dodd-Frank bill – which President Barack Obama signed into law last July to regulate Wall Street against the excesses that led to the Great Recession — is in danger of being gutted if Republicans’ proposed deep spending cuts become a reality.  Representative Barney Frank (D-MA) pointedly criticized Republicans’ proposal to slash government spending to 2008 levels. According to Frank, that is not an option because the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) need funding to hire hundreds of employees to write and issue regulations to give the new law teeth.  Frank co-sponsored the bill with former Senator Christopher Dodd (D-CT).

Unfortunately, the positive things that Dodd-Frank was designed to accomplish have run head on into the non-partisan Congressional Budget Office’s (CBO) bleak warning about the direction of the nation’s debt.  According to NPR  Planet Money correspondent David Welna, “It was not a pretty picture that CBO director Douglas Elmendorf painted as he sat before the budget committee”. This year’s deficit, he said, will be nearly $1.5 trillion dollars, nominally the largest in history.  And if the tax breaks that got extended this year continue throughout the next decade, Elmendorf said the nation’s debt would grow to be the size of its economy, something that hasn’t happened since the end of World War II.  The time to do something about it, he told the grim-faced panel of senators, is now.”

Elmendorf warned that “The longer the necessary adjustments are delayed, the greater will be the negative consequences of the mounting debt, the more uncertain individuals and businesses will be about the future government policies, and the more drastic the ultimate policy changes will need to be.”  Senator Kent Conrad (D-ND), chairman of the Senate Budget Committee, said “The thing that makes the most sense is there is a summit between the White House, leaders in the House and the Senate, because at the end of the day, the White House has got to be at the table. And unfortunately, during the budget process, the president is left out.”  NPR’s Welna continues, “The revenue side of the equation, of course, is taxes and raising them has been a taboo topic for most in the GOP.  But the likely need for more revenues was underscored toward the end of today’s hearing when Conrad noted that the Social Security surplus that lawmakers have been raiding for years disappeared this year and instead, Social Security has started cashing in its IOUs with the Treasury.”  Social Security will post nearly $600 billion in deficits over the next 10 years as the economy recovers and millions of baby boomers begin retiring, according to new congressional projections.

House Republicans, led by Representative Scott Garrett (R-NJ), chairman of the House Financial Services Subcommittee on Capital Markets and Government-Sponsored Enterprises, wants to cut $55 to $60 billion in non-defense spending during fiscal year 2011.  “A dramatic spending increase to fund the SEC and CFTC, as envisioned by the authors of the Dodd-Frank legislation, would further the mindset that our nation’s problems can be solved with more spending, not more efficiency,” according to Garrett.  Frank countered that Garrett’s comments only reinforce his “fear that Republicans are attempting to cripple regulation by failing to fund it.  I had thought even among people in the Tea Party that credit default swaps were not that popular.  We’re arguing the security of the average American was far more endangered by the financial crisis than by a lot of other things that our military does.”

If the cuts are put into place, the SEC and CFTC would be frustrated in their mandates, such as setting up a new office of municipal securities, according to Frank.  The Republican response to Democratic concerns is that their goal is to make federal regulators more efficient.  Representative Spencer Bachus (R-AL), chairman of the House Financial Services Committee, said “Past experience indicates that a few investigative reporters have been more effective than the many employees at the SEC in addressing and exposing financial wrongdoing.”

The Canary in the Mine Shaft

Thursday, March 25th, 2010

Brooksley Born predicted market collapse and financial meltdown and nobody listened.  A decade before the financial meltdown, one woman was sounding the alarm that a catastrophe was coming.  That woman is Brooksley Born, who correctly predicted that investments known as over-the-counter derivatives could cause a financial crisis.  As Chairman of the Commodity Futures Trading Commission (CFTC) during the second Clinton administration, Born would wake up “in a cold sweat” fearing that derivatives like credit-default swaps might cause the economy to implode.

Ultimately, Born’s worst fears became reality despite the fact that former Federal Reserve chairman Alan Greenspan had dismissed her concerns.  According to Born, Greenspan “explained there wasn’t a need for a law against fraud because if a floor broker was committing fraud, the customer would figure it out and stop doing business with him.”  The comment made no sense to Born, a Stanford-educated lawyer who had spent most of the 1980s defending clients enmeshed in a conspiracy perpetrated by Nelson and William Hunt, the wealthy Texas brothers who had duped investors while trying to control the world silver market.

The CFTC was established in the 1970s, primarily to regulate futures contracts bought by farmers as a hedge against price fluctuations.  By the time Born took the CFTC’s helm in 1996, the futures market had grown more sophisticated.  Born believed that the mostly unregulated “dark markets” were showing signs of trouble.  “I was very concerned about the dark nature of these markets,” Born said.  “I didn’t think we knew enough about them.  I was concerned about the lack of transparency and the lack of any tools for enforcement and the lack of prohibition against fraud and manipulation.”

Born has now been vindicated, and the Obama administration has introduced legislation to regulate the derivatives markets.  Additionally, she was honored with a prestigious John F. Kennedy Profiles in Courage award last year.