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Tuesday, 21 May 2013 10:42

US Economy at Risk as Regulatory Agency Allows Big Banks to Continue Secret and Non-Competitive Derivatives Trading

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wallstreet35Wall Street Regulation Takes a Giant Step Backwards to 2008Yes, as the GOP endlessly bamboozles the corporate mainstream media about Benghazi, the multitude of challenges facing the United States continues to mount.

Take for example a widely overlooked "regulation" that rolls the clock back, in many ways, to the Wild West derivatives' market leading up to the 2008 crash.

The New York Times has been one of the few "status quo" newspapers to realize the potentially ominous implications of a new Commodities Futures Trading Commission (CFTC) rule that will allow banks too big to fail to gamble with the economy, as if it were 2008 all over again. 

Yes, there has been some increased regulation of Wall Street as a result of the Dodd-Frank law – and other augmented oversight.  But it has been far too little counterweight to the powerful plutocratic forces of Wall Street.  

A May 20 NYT Editorial, "Derivatives Reform on the Ropes," warns of the perilous CFTC action:

New rules to regulate derivatives, adopted last week by the Commodity Futures Trading Commission, are a victory for Wall Street and a setback for financial reform. They may also signal worse things to come….

In the run-up to the financial crisis — and since — the lack of transparency and competition has fostered recklessness and instability. But banks like opacity, because their outsized profits depend on keeping clients in the dark about what other clients pay in similar deals. Under the Dodd-Frank law, derivatives are supposed to be traded on “swap execution facilities,” which are to operate much like the exchanges that exist for equities and futures.

Even as the new rules shift much of the trading to those facilities, they will also preserve the ability of the banks to maintain their old practices. For instance, the commission’s initial proposal called for hedge funds, asset managers and corporations to contact at least five banks when seeking prices for a derivatives contract. In a major concession to the banks, that number was lowered to two in the final rule….

The initial proposal also called for derivatives trading to take place on open electronic platforms. The final rules will allow much of the negotiation over derivative prices to take place over the phone, a practice that is difficult to monitor and prone to abuse.

DC insiders and Wall Street financial masters of the universe will continue arguing that they have been saddled with onerous regulations, even as they smirk because "compromises" such as the CFTC voted on last week are really what they wanted in the first place. As the NYT editorial implied, there is nothing so reassuring to a financial market billionaire as dank darkness free from the sun light of transparency and accountability.

Before the CFTC vote, the NYT ran a news story that stated that some critics fear a return to the "precrisis status." 

So for the moment, the biggest financial institutions in America can go on partying like its 2008, while the rest of us need to be prepared to once again wake up with a financial hangover and a broken economy.

(Photo: david_shankbone)