The U.S. Senate debate to regulate over-the-counter (OTC, off-exchange and largely unregulated) derivatives enters its third week. Everybody, it appears, is now a proponent of “reform,” especially erstwhile acolytes of deregulation. But what the rhetoric of reform giveth with one hand, it taketh away with the dozens of exemptions from regulation proposed by Wall Street on behalf of major financial institutions and their corporate clients.
Derivatives are financial instruments based on the value of an underlying asset, such as the price of a corn futures contract or an interest rate. Derivatives, such as those created and sold by Goldman Sachs for the government of Greece, can help disguise debt as an asset, at least long enough to postpone the day of reckoning. A chart compiled by Commodity Markets Oversight Coalition (CMOC) member Sean Cota shows the extent to which the contract face value of OTC derivatives dwarfs the value of exchange-traded commodities, stocks and bonds, and the global Gross Domestic Product—i.e., goods and services, including those provided by retail financial institutions.
Commodity Futures Trading Commission chairman Gary Gensler has called OTC derivatives a major factor in causing the financial and commodity market bubble that burst in 2008 when major OTC dealers couldn’t pay up for failed OTC trades. In mid-April, the Senate Agriculture Committee passed a bill that would force most OTC trades onto public and regulated exchanges to enable both CFTC and Securities and Exchange Commission regulators to monitor market data and prevent excessive speculation and other violations of U.S. financial law. Among the financial industry lobbyists opposing the bill are 40 former Senate staffers and former Senator Trent Lott. Normally, the access of these staffers to their former bosses—and in Senator Lott’s case, access to the Senate floor during voting and last-minute deal making—would ensure another Wall Street victory against reform. But these are not normal times.
On April 29, the Coalition of Derivatives End Users (organized by the Chamber of Commerce, Business Roundtable and the National Association of Manufacturers) responded to the Senate Agriculture Committee bill with language that would exempt coalition members, mostly transnational corporations and their banks, from trading on public exchanges. Chairman Gensler has estimated that such changes would leave up to 60 percent of OTC trades in the unregulated “dark market.” On May 4, the CMOC, of which IATP is a member, wrote to the Senate leadership to outline their opposition to creating the broad exemptions proposed by the coalition. The letter stated, “Our coalition opposes any expansion of exemptions in the derivatives title in such a way as to create new loopholes for financial market interests.” On May 7, the Americans for Financial Reform, comprising more than 250 consumer, employee, investor and civil rights organizations, wrote to all senators to oppose an amendment by Senator Saxby Chambliss that incorporated the coalition language for broad exemptions from regulation.
The amendments supported by the CMOC and AFR are dismissed out of hand by Wall Street lobbyists as “whack jobs.” According to The Washington Post, “‘They've got to get this thing off the [Senate] floor and into a reasonable, behind the scenes’ discussion, said one lobbyist. ‘Let's have a few wise fathers sit around the table in some quiet room’ and work out the details.” His confidence in the ability of the lobbyists to undo the work of the Senate agriculture committee OTC derivative bill was bolstered by a certainty that nobody would pay attention to “quiet room” changes favoring their clients in a 1,300-page bill that only the lobbyists would read.
The density of proposed Wall Street exemptions led the Financial Times to wonder whether financial reform could be better defended if U.S. legislators combined their rule-oriented approach with a principles-based financial regulation practiced in Europe. Would the lobbying power of the “quiet room” diminish if the principles at the outset of a bill were clear and binding statements to eliminate the loopholes and waivers that triggered the legalized chicanery of the financial services industry during the past decade? One place to answer that question would be the conference of Senate and House of Representatives members appointed to negotiate differences between the two bills, assuming that the Senate will pass a financial reform bill. Binding principles could be added to make it more difficult for Wall Street to circumvent the bill.
President Barack Obama would like to go the Group of Twenty meeting, June 26–27 in Toronto, with his signature on a financial services reform bill. It will be difficult to assert U.S. leadership on financial reform without a signed bill. If the Senate passes its bill prior to the end of May Senate recess, and the differences between the House and Senate bills can be negotiated during the first three weeks of June, President Obama may go to Toronto with a reform template that he will try to sell to other G-20 members. But if the bill contains the broad exemptions demanded by Wall Street, he may find that other heads of state, whose taxpayers are still paying the costs of U.S. deregulation and financial “innovation,” aren’t buying.
