Friday, December 11, 2009

Toothless, Toothless, Tooo-ooothless

Hum along to the Neil Young song "Helpless". I'm referring to the latest version of regulation from the dingbats that call themselves our leaders in Washington, D.C. As feared (by me), so-called 'commercial' end users of derivatives will not have to toe the OTC clearing/transparency line. In theory I can agree with this, as they of course have to hedge commodities and currency exposures. In practice it is clear that none of the regulators, and in particular the CFTC, has got a clue what the difference is between 'commercial' and 'speculative trader'. If the CFTC and the government think that Cargill (one of the examples that I keep seeing) is a commercial hedger only, then they are smoking something not quite legal. Cargill is one of the biggest speculative traders out there. It is also a privately held company so much of its business is just that - private. The bill is so watered down and full of loopholes and double-talk that I find it hard to believe that even one of the politicians on Capitol Hill truly understands what he or she is reading. The bottom line is that the powers-that-be on Wall Street gave the government a good, old-fashioned rogering - probably threatening direct financial consequences if regulation was too strict. Given that anywhere from 12-14% of US GDP reputedly comes from financial services, it would take a brave politician indeed to truly stand against them.
Although some of the things that slid through, such as not requiring foreign exchange trades to be cleared, make sense. FX markets work perfectly well without getting exchanges involved. I also support limiting bank ownership of clearing platforms. I never understood how the 'fox guarding the henhouse' situation was allowed to begin with.

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