| Let's start at the beginning, Credit Default Swaps are effectively insurance taken out that pays off if a derivative defaults. The trouble we got into with Credit Default Swaps (CDSs) is that the CDSs were not regulated. The other problem was that people were buying CDSs that didn't own the underlying derivative. This is called a naked CDS which I've heard was about 90% of the total market. Basically this was just gambling, unregulated gambling. Which is rare, because whether it's Vegas, a riverboat, a lottery or online cards, gambling in this country is always regulated and either taxed or made illegal. If it were anyone other than Wall Street betting on these CDSs it would have been shut down or taxed.
What does this have to do with agriculture? The CFTC is one of two regulatory bodies competing for the role of CDS regulator. The CFTC, Commodities Futures Trading Commission is overseen by the House Agriculture Committee. |
An article was written in the Wall Street Journal Friday that really scared/annoyed me. It was titled Financial Overhaul Raises Questions. Of course we must consider that the WSJ is a Murdoch property, and must be treated with caution. However it fits into a narrative that I've been writing for myself (and scaring myself with) and it seems like a quality article. That narrative is that the Obama administration and the current Congress are going to go for the path of least resistance. That means, if a reform is going to cost jobs or hurt the economy/stock market, they probably won't do it.
WASHINGTON -- Obama administration officials are debating whether to pare some of their more ambitious ideas to revamp oversight of financial markets, in a nod to the political difficulties of pushing through sweeping changes, people familiar with the process say.
At issue is whether officials want to reorganize the basic structure of oversight, or whether they will settle for new rules at existing agencies that would accomplish the same goal.
What does real reform look like? It would be a reversal of the CFMA of 2000 and the Gramm Leach Bliley act. Both of which repealed Depression era regulations which kept banks and investment houses from merging, as well as keeping single stock futures off the market. For our purposes lets focus on the CFMA, since I have no clue how you split up these too big to fail investo-banks that George Bush's Treasury department helped make even bigger.
The CFMA which was slipped into a budget/appropriations bill at the tail end of the Clinton administration is what needs to be changed. To his credit our Treasury Secretary has stated that he wants to amend it.
Treasury Secretary Tim Geithner announced on May 13, 2009 the Obama Administration's intent to amend the CFMA, and related laws of the Commodities Exchange Act and Securities Exchange Act, changing the authority of regulatory bodies, including the Commodities Futures Trading Commission and the Securities Exchange Commission and other regulators over previously unregulated derivatives. In brief, to constrain systemic risks, the proposal requires the clearing of all standardized over the counter derivatives through regulated central counter-parties (CCPs) via a regulated central exchange.
They do this by, first getting rid of the OTS (Office of Thrift Supervision)
The Obama administration is expected to call for the Office of Thrift Supervision -- which regulates thrifts and has faced heavy scrutiny for its supervision of American International Group Inc., Washington Mutual Inc. and IndyMac Bancorp Inc. -- to be either abolished or folded into a larger regulator with broader powers.
This seems to be the easy part, even though the OTS doesn't want to give up it's power. The tough part is figuring out who will regulate CDSs. Currently the CFTC is overseen by the House Ag Committee, which makes sense considering soybeans, pork bellies and corn futures are some of the top traded commodities. It makes less sense when considering that they are also the watchdogs for oil futures, and now potentially for credit default swaps. Both the SEC and CFTC are fighting to keep their power, so this will be an interesting battle. But in the end, we just badly need these increased regulations. I really don't care how difficult the solution is, you have to break some eggs to make ... good pancakes.
Crossposted at the Progressive Electorate and the Daily Kos |
