You can always count on Americans to do the right thing – after they’ve tried everything else
Posted: July 26th, 2011
“You can always count on Americans to do the right thing—after they’ve tried everything else.” It’s an over-used quote of Winston Churchill. But, boy, I hope it’s true. However, at this writing things are not looking good.
It was paraphrased by former Treasury Secretary and chief White House economic advisor, Larry Summers in a Charlie Rose interview published in Bloomberg Businessweek on July 18. You can read that interview at: http://www.businessweek.com/magazine/charlie-rose-talks-to-lawrence-summers-07142011.html
Summers was referring to the deficit ceiling impasse in congress; a circus in three rings that just refuses to end. It could just as well apply – and I hope it does – to derivatives regulatory reform. It’s been a year since the passage of the Dodd-Frank Financial Regulation Bill.
Whether by design or not, Dodd-Frank is the mother of all financial reform bills. Instead of taking a prudent amount of time to actually diagnose the specific causes of the financial crisis and then providing targeted medicine to address those issues, Dodd-Frank was rushed into existence. It prescribes the writing and enactment of about 400 new rules; wholesale changes to the way the financial markets work and particularly the derivatives markets.
I’m certain this urge to remake the derivatives markets, post crisis, was driven by politicians as a result of that famous quote by Warren Buffet, head of Berkshire Hathaway, that “derivatives are weapons of mass destruction…” Derivatives and the derivatives markets are difficult to understand by people versed in the field. So providing a quote like that to a politician is like summing up the tax code in 6 words. Yes, it’s a simple characterization; but hardly helpful or elucidating. And it’s especially ironic coming from someone whose company has shorted long-dated index puts on about $60 billion in underlying interest.
So here we are a year later. Rule making is well behind schedule and it’s now becoming quite apparent that there was no analysis of the impact of all the mandated changes – some of which could prevent non-financial corporations, the customers of the banks who had nothing to do with the causes of the crisis, from hedging their risks [you can call them “collateral damage”]. Last week the FINCAD News blog reported that the CFTC is delaying the implementation of certain regulations that “would otherwise apply to swaps or swap dealers,” according to Gary Gensler, the CFTC chairman. See: http://derivative-news.fincad.com/derivatives-news/cftc-delays-implementation-of-dodd-frank-1289/ and the mood is moving towards lightening up on the new rules. But that is far from certain.
A lot has already been written about the current state of play with this whole process [rhymes with “mess”], so I won’t dwell on it here, but in a few future posts I intend to suggest how it might have been if it had been done right. If you are interested in finding out generally where the regulatory process is right now, here are two good articles that provide a summary that should be good enough for everyone who is not the general counsel of a bank:
Dodd-Frank Financial Regulation Bill Turns One. Not Nearly Potty-Trained.
Regulatory Reform: A Disappearing Act?
If and when congress passes a debt ceiling increase you can bet their attention will return to Dodd-Frank and changes will be made to it. The question is, will the changes be any smarter than the original bill?