31 August 2009

Five Wall Street Banks Seek to Protect Lucrative OTC Derivatives Market

Gottes Mühlen mahlen langsam, mahlen aber trefflich klein
Ob aus Langmut er sich säumet, bringt mit Schärf' er alles ein*.
Friedrich von Logau
This story about the Wall Street lobby was interesting, particularly since this morning Bill Dudley, friend of Wall Street, Goldman alumnus, and President of the NY Fed, called for the continuing purchase of over a trillion dollars in bad mortgage debt from these banks at above market prices here.

And here the Natinoal Association of Business Economists NABE (the Finanz Freikorps) has recommended that there be no new stimulus packages aimed at the public and consumers, who have had enough. In fact, the government should begin to cut spending on public programs.

But not a word about the subsidy to these money addicts, the banks, who use the opaque derivatives markets to widen the spreads on products, to hoodwink the naive and less sophisticated individuals and small towns.

And so Wall Street once again gathers its forces to persuade (provide many millions in donations and soft bribes) to Congress and the Administration.

Do you get the picture yet?

Wall Street Stealth Lobby Defends $35 Billion Derivatives Haul

By Christine Harper, Matthew Leising and Shannon Harrington

Aug. 31 (Bloomberg) -- Wall Street is suiting up for a battle to protect one of its richest fiefdoms, the $592 trillion over-the-counter derivatives market that is facing the biggest overhaul since its creation 30 years ago.

Five U.S. commercial banks, including JPMorgan Chase & Co., Goldman Sachs Group Inc. and Bank of America Corp., are on track to earn more than $35 billion this year trading unregulated derivatives contracts. At stake is how much of that business they and other dealers will be able to keep.

Business models of the larger dealers have such a paucity of opportunities for profit that they have to defend the last great frontier for double-digit, even triple-digit returns,” said Christopher Whalen, managing director of Torrance, California-based Institutional Risk Analytics, which analyzes banks for investors.

The Washington fight, conducted mostly behind closed doors, has been overshadowed by the noisy debate over health care. That’s fine with investment bankers, who for years quietly wielded their financial and lobbying clout on Capitol Hill to kill efforts to regulate derivatives. This time could be different. The reason: widespread public and Congressional anger over the role derivatives such as credit-default swaps played in the worst financial crisis since the Great Depression...

The five biggest derivatives dealers in the U.S. -- JPMorgan, Goldman Sachs, Bank of America, Morgan Stanley and Citigroup Inc. -- held 95 percent of the $291 trillion in notional derivatives value of the country’s 25 largest bank holding companies at the end of the first quarter, according to a report by the Office of the Comptroller of the Currency. More than 90 percent of those derivatives were traded over the counter, the OCC data show...

Obama’s plan deals another blow to banks. It aims to discourage them and their customers from using non-standard, or customized, derivatives that can’t be processed by a clearinghouse or traded on an exchange by requiring that parties to such trades hold more capital to protect themselves against losses. The plan would also require they put up more money, known as margin, to insure they make good on the trades. Both changes would impose added costs on banks and some customers...

The Obama proposals don’t go as far as some people have urged. Hedge fund billionaire George Soros and Berkshire Hathaway Inc. Vice Chairman Charles Munger are among investors who have called for limits on the use of credit-default swaps. Soros wrote in a March 24 Wall Street Journal column that regulators should ban so-called naked swaps, in which the buyer isn’t protecting an existing investment.

Two days later Treasury Secretary Timothy Geithner dismissed such an idea before the House Financial Services Committee, telling members that “my own sense is that banning naked swaps is not necessary and wouldn’t help fundamentally.”

Janet Tavakoli, founder and president of Tavakoli Structured Finance Inc. in Chicago, said in an interview that derivatives have allowed banks to camouflage risk.

“There has been massive widespread abuse of over-the- counter derivatives, which have contributed to transactions that people knew or should have known were overrated and overpriced at the time they came to market,” said Tavakoli, who traded, structured and sold derivatives over more than two decades in the financial industry.

Wall Street is accustomed to getting its way with derivatives legislation. The last major congressional action, in 2000, was designed to exempt over-the-counter derivatives from government oversight...

For Wall Street, the longer it takes to get legislation passed the better. As stock market values and the economy improve, anger at banks is likely to subside...

* "Though the mills of God grind slowly, they grind exceeding fine;
With patience He grinds slowly, with exactness all He finds."