derivatives

Proteonomix, Inc. (PROT) Updates Its Global Activities; Ian McNiece Joins Board of Directors

January 3, 2011

MOUNTAINSIDE, NJ–(Marketwire – January 3, 2011) – PROTEONOMIX, INC. ( OTCBB : PROT ), a biotechnology company focused on developing therapeutics based upon the use of human cells and their derivatives, is pleased to provide an update on the Company’s addition to its Board of Directors. Proteonomix, Inc. is pleased to announce that Ian McNiece has been appointed to the Proteonomix Board of Directors effective today. Dr. McNiece, has served as Vice-President for Scientific Development and Chief Scientific Officer since November 11, 2009. He received his PhD in 1986 from the University of Melbourne undertaking his thesis work in studies of blood cell development at the Peter MacCallum Cancer Institute in Melbourne, Australia . He moved to the United States in July, 1986 to the University of Virginia as a postdoctoral fello

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Federal Reserve ‘Will Be Gone’ In 25 Years, Top Financial Mind Predicts, Despite Geithner’s Vote Of Confidence

September 30, 2010

A mere half-hour after Treasury Secretary Timothy Geithner praised the “necessary” and “very substantial” actions of the Bush and Obama administrations to “break the back of the financial crisis,” one of the world’s leading financial minds said Thursday that the United States is in the same economic predicament today as it was in 2007, predicting that within 25 years the Federal Reserve “will be gone.” Nassim Nicholas Taleb, renowned derivatives trader, university professor and author of “The Black Swan,” warned a gathering in Washington of the growing risk the nation has taken on as a result of poor decisions by the Fed and policymakers, including trillions of dollars in taxpayer money funneled into bailouts of private industry. “This transformation from private debt … to public debt” is “bad” from a risk standpoint and “immoral” from an ethical standpoint, Taleb — a member of the Derivatives Hall of Fame whose book became a bestseller — told a crowd at the Washington Ideas Forum, an event held by The Atlantic and The Aspen Institute. Deficits “will break the Fed” and it will be replaced, he predicted. “The Romans had a saying,” Taleb added: “The grandchildren should not bear the debt of the grandparents.” That debt is made more dangerous, Taleb said, by the increasingly complexities of the financial system, a problem that he said has not been ameliorated during the last three years. “Debt and complexity are not friends,” he said, because “complexity causes unpredictability,” and heavy debt burdens mean one false move, whether by an individual actor or a system, could spell disaster. Nobel Prize-winning economist Paul Krugman, a popular columnist for The New York Times, “doesn’t understand” the economic situation the U.S. finds itself in, Taleb claimed, nor do most economists. Because of the significant rise in debt, within 25 years “anything fragile will break,” Taleb said. That includes the Fed, he argued, because the Fed “fragilized this country.” “The Fed is what got us here,” he said, because of its inattention to risks in the financial system. “It’s like someone flying a plane without understanding how to fly.” Geithner appeared before the same crowd shortly before Taleb. His assessment of the economy and actions taken in response was essentially the exact opposite. The Treasury Secretary, who as the head of the Federal Reserve Bank of New York played a key role in the immediate response to 2008′s financial meltdown, told the crowd that without the “very substantial” financial force brought to bear “early and quickly” to fight the crisis, “nothing else would be possible.” “It’s worth just stepping back and recognizing that this country did do the necessary thing … in acting earlier to break the back of the financial crisis,” Geithner said in reference to controversial actions such as the Troubled Asset Relief Program and the stimulus bill. Referring to the $800 billion stimulus as “exceptionally large” and TARP as “overwhelming financial force,” Geithner said the two policy decisions are the two most important judgments made by the outgoing Bush administration and incoming Obama administration. Though private-sector economists generally conclude that the stimulus was a success, the unemployment rate has jumped from 8.2 percent to 9.6 percent since it was enacted into law on Feb. 17, 2009, Labor Department figures show. Economists argue that unemployment would have been much higher without the stimulus, though they acknowledge it would likely be lower if the stimulus had been larger. As for TARP, it helped the banking sector recover by instilling confidence in market participants — in part because the world now knew that the U.S. government was prepared to rescue large, systemically-important institutions by virtually any means necessary. The Fed’s multi-trillion dollar commitment to the financial sector and its near-zero interest rate policy likely helped, too. ************************* Shahien Nasiripour is the business reporter for the Huffington Post. You can send him an e-mail ; bookmark his page ; subscribe to his RSS feed ; follow him on Twitter ; friend him on Facebook ; become a fan ; and/or get e-mail alerts when he reports the latest news. He can be reached at 646-274-2455.

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Neil McCormick, UBS Banker, Jumped To His Death After Snorting Cocaine

September 8, 2010

Neil McCormick, the head of UBS’s Asia Derivatives Unit, jumped to his death in London after ingesting cocaine at a party, according to the U.K.’s Daily Mail report of a court investigation into the death. (Hat tip to Business Insider. ) On June 21, Reuters reported that McKormick had died , based on a statement from UBS. McCormick, 36, had returned to London and was attending a party thrown in his honor, according to the Daily Mail’s account of the investigation. After walking around mumbling to himself, one attendee had this very grim description of McCormick’s death: I saw him vault between the window boxes and the balustrade, then there was a scramble. That’s the image I will probably have solidly with me forever. He steadied himself, and that was it.’ According to IFRAsia, McKormick worked at JPMorgan for more than 10 years prior to UBS and was a founding member of JPMorgan’s “exotics” team. Check out the full article at the Daily Mail .

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Neil McCormick, UBS Banker, Jumped To His Death After Snorting Cocaine

September 8, 2010

Neil McCormick, the head of UBS’s Asia Derivatives Unit, jumped to his death in London after ingesting cocaine at a party, according to the U.K.’s Daily Mail report of a court investigation into the death. (Hat tip to Business Insider. ) On June 21, Reuters reported that McKormick had died , based on a statement from UBS. McCormick, 36, had returned to London and was attending a party thrown in his honor, according to the Daily Mail’s account of the investigation. After walking around mumbling to himself, one attendee had this very grim description of McCormick’s death: I saw him vault between the window boxes and the balustrade, then there was a scramble. That’s the image I will probably have solidly with me forever. He steadied himself, and that was it.’ According to IFRAsia, McKormick worked at JPMorgan for more than 10 years prior to UBS and was a founding member of JPMorgan’s “exotics” team. Check out the full article at the Daily Mail .

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Jim Collura: Derivatives Reform Will Benefit — Not Burden — End Users

July 15, 2010

In the course of the two-year long debate on how best to reform the derivatives markets, much attention has been given to the concerns of so-called “end-users,” or businesses that use derivatives to hedge against various forms of risk, including not only airlines, utilities and manufacturers, but also small business farmers, gasoline stations and home heating companies. However, end-users have had growing concerns about the state of the derivatives markets that predate the 2008 financial collapse. Many have argued that these concerns are addressed, not exacerbated, by proposed reforms included in Wall Street reform package. For more than a century, derivatives have been used by producers, processors, transporters and marketers of commodities – such as gasoline, home heating oil, wheat and livestock – to insulate their businesses and consumers from price risk. And for much of their history, they were a stable, reliable and transparent means of doing so. However, if you speak to anyone who has used derivatives products for more than a decade, they will tell you that everything changed in 2000. The financial industry successfully secured blanket exemptions from Congress and federal regulators that led to a transformation of derivatives markets from simple commodity exchanges to the opaque and unregulated, multi-trillion dollar markets we know today. To remain competitive, regulated exchanges weakened their own prohibitions on speculation, and allowed traders in the U.S. to access new subsidiaries in countries with weaker oversight. Over-the-counter and foreign derivative trading markets boomed, to the detriment of the traditionally stable domestic environments. These changes lead to a “Wild West”-like environment. Excess volatility became the norm. Price spikes in commodities, most especially those experienced in 2007-2008, seemed to be dislocated from supply and demand fundamentals. Speculators were diving head-long into derivatives, and by 2008, came to dominate commercial hedgers four-to-one. As commodity speculation swelled, retail gasoline and home heating oil prices surged beyond $4 per gallon. Trade associations attributed as much as $1 or more of these prices to speculation, despite the more than adequate inventories and a decline in demand. Global food prices were similarly rocked and the UN estimates that an additional 130 million people were driven to hunger as a result. Derivatives reform will address many of these issues. Mandatory reporting, clearing and capital requirements for all derivatives would create transparency and much needed confidence in these markets, while a hedge exemption for bona-fide end-users would protect commercial businesses. It would also require that foreign exchanges doing business in the U.S. register with our regulators and encourage new cooperation with overseas agencies. The bill also contains new tools that will help the Commodity Futures Trading Commission or CFTC, the principal regulator of derivatives, police against fraud and manipulation. It would also protect end-users from excessive speculation by expanding a 1936 statute requiring the CFTC to limit positions that speculators can take in a commodity, include over-the-counter markets in these limits and, importantly, establish aggregate limits across all markets. Still, news coverage and op-eds have suggested that end-users are unified in opposition to reform due to fears that it will result in new government regulation and capital requirements, despite the well articulated hedge exemption and support for the legislation from airline, trucking, gasoline, home heating, and various agricultural industry groups. If the “Wild West” was tamed by law and order, then the derivatives markets will be tamed by increased transparency, stability and confidence that legislative reform will bring. An important and reliable tool that hedgers have relied on for years will be returned to them and for this reason, end-users will benefit – not be burdened by – long overdue and comprehensive reform. The only derivatives users that need worry about this reform are those that have exploited the status quo recklessly and irresponsibly, driving up costs for all Americans and threatening our nation’s economic stability and competitiveness. They fear it, and rightly so.

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Maria Cantwell Backs Financial Reform Bill, Senate Nears Margin Needed For Cloture

July 1, 2010

WASHINGTON–Sen. Maria Cantwell (D., Wash.) said in an interview Thursday she would vote for the financial-overhaul bill when lawmakers return from the July 4th recess, bringing the White House to the verge of the 60 Senate votes it needs to ensure passage. Ms. Cantwell said she was convinced the bill would toughen regulation of the derivatives market. Specifically, she had insisted the bill contain penalties for companies who didn’t certain swaps through a “clearing” process meant to increase transparency in the market.

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Maria Cantwell Backs Financial Reform Bill, Senate Nears Margin Needed For Cloture

July 1, 2010

WASHINGTON–Sen. Maria Cantwell (D., Wash.) said in an interview Thursday she would vote for the financial-overhaul bill when lawmakers return from the July 4th recess, bringing the White House to the verge of the 60 Senate votes it needs to ensure passage. Ms. Cantwell said she was convinced the bill would toughen regulation of the derivatives market. Specifically, she had insisted the bill contain penalties for companies who didn’t certain swaps through a “clearing” process meant to increase transparency in the market.

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Maria Cantwell Backs Financial Reform Bill, Senate Nears Margin Needed For Cloture

July 1, 2010

WASHINGTON–Sen. Maria Cantwell (D., Wash.) said in an interview Thursday she would vote for the financial-overhaul bill when lawmakers return from the July 4th recess, bringing the White House to the verge of the 60 Senate votes it needs to ensure passage. Ms. Cantwell said she was convinced the bill would toughen regulation of the derivatives market. Specifically, she had insisted the bill contain penalties for companies who didn’t certain swaps through a “clearing” process meant to increase transparency in the market.

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Final Derivatives Showdown Thursday: Read The House Offer

June 23, 2010

The long-awaited showdown between banks and Sen. Blanche Lincoln over her derivatives reform section of the Wall Street bill begins Thursday morning. The conference committee will consider an offer made by the House to amend Senate legislation that forces banks to spin off their swaps desk and separately capitalize that operation, while also bringing the business out into the open, requiring derivatives to be cleared and traded on exchanges. The complexity of the legislation leaves much room for mischief, but the House offer does not alter Lincoln’s most significant provision — the swaps spinoff, known as 716. However, one analyst identified an end-run the House may be attempting. Section 754 of the offer says that “the Bank Holding Company Act of 1956 is amended by striking ‘commodities activities’ each place it appears and inserting ‘commodities and swap activities,’ which would make the swaps desks a ‘functionally regulated subsidiary.’” That would mean that a bank getting taxpayer assistance through the Federal Reserve window would still be required to spin off its swaps desk, but it could maintain it within a separate section of the bank holding company that isn’t getting government assistance. “This is not as strong as a complete spinoff, but it still will have positive implications for the derivatives markets in the medium to long term,” Adam White, director of research at White Knight Research & Trading, told HuffPost. White is a backer of Lincoln’s original language. The improvement would come because the big banks currently have a major competitive advantage in the swaps business: Everyone knows that they’re “too big to fail,” so that if they don’t have the capital to pay off a losing bet, the government will step in and their counterparties will be paid. The smart move, then, is to trade with such banks. If the swaps desk were no longer part of the bank itself, but rather part of the bank holding company, the chance of a bailout is diminished, White said. The House also weakens the Senate legislation in a variety of ways that would lead to fewer trades being cleared and lower capital requirements. Notably, however, the changes are made in slight ways, rather than as a broad attempt to remove the reforms entirely, meaning that Lincoln has won the public relations battle. Whether that means she can also win in the trenches and emerge with her reform in tact is a question that will be answered on C-SPAN Thursday. The language of the House offer can be found here. Send observations and analysis to ryan@huffingtonpost.com or shahien@huffingtonpost.com. Lincoln, a Democrat from Arkansas, introduced her legislation under pressure from a progressive primary challenger. She fended off the insurgency, but progressives were left with major swaps reform which is, against all odds, still alive.

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Final Derivatives Showdown Thursday: Read The House Offer

June 23, 2010

The long-awaited showdown between banks and Sen. Blanche Lincoln over her derivatives reform section of the Wall Street bill begins Thursday morning. The conference committee will consider an offer made by the House to amend Senate legislation that forces banks to spin off their swaps desk and separately capitalize that operation, while also bringing the business out into the open, requiring derivatives to be cleared and traded on exchanges. The complexity of the legislation leaves much room for mischief, but the House offer does not alter Lincoln’s most significant provision — the swaps spinoff, known as 716. However, one analyst identified an end-run the House may be attempting. Section 754 of the offer says that “the Bank Holding Company Act of 1956 is amended by striking ‘commodities activities’ each place it appears and inserting ‘commodities and swap activities,’ which would make the swaps desks a ‘functionally regulated subsidiary.’” That would mean that a bank getting taxpayer assistance through the Federal Reserve window would still be required to spin off its swaps desk, but it could maintain it within a separate section of the bank holding company that isn’t getting government assistance. “This is not as strong as a complete spinoff, but it still will have positive implications for the derivatives markets in the medium to long term,” Adam White, director of research at White Knight Research & Trading, told HuffPost. White is a backer of Lincoln’s original language. The improvement would come because the big banks currently have a major competitive advantage in the swaps business: Everyone knows that they’re “too big to fail,” so that if they don’t have the capital to pay off a losing bet, the government will step in and their counterparties will be paid. The smart move, then, is to trade with such banks. If the swaps desk were no longer part of the bank itself, but rather part of the bank holding company, the chance of a bailout is diminished, White said. The House also weakens the Senate legislation in a variety of ways that would lead to fewer trades being cleared and lower capital requirements. Notably, however, the changes are made in slight ways, rather than as a broad attempt to remove the reforms entirely, meaning that Lincoln has won the public relations battle. Whether that means she can also win in the trenches and emerge with her reform in tact is a question that will be answered on C-SPAN Thursday. The language of the House offer can be found here. Send observations and analysis to ryan@huffingtonpost.com or shahien@huffingtonpost.com. Lincoln, a Democrat from Arkansas, introduced her legislation under pressure from a progressive primary challenger. She fended off the insurgency, but progressives were left with major swaps reform which is, against all odds, still alive.

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Swaps Desk Compromise for Two-Year Phase-In Considered by Senator Lincoln

June 14, 2010

By Phil Mattingly June 14 (Bloomberg) — Senator Blanche Lincoln is considering compromise language to her derivatives proposal that would phase in over two years a requirement that commercial banks push out their swaps trading desks to subsidiaries. The proposal also would allow the Federal Reserve to provide system-wide emergency assistance to swaps dealers, according to a draft of the compromise obtained by Bloomberg News and confirmed by Lincoln’s office today. The changes are aimed at clarifying questions about the original language and do not pull back from the purpose of the measure, which is to separate commercial banking from derivatives trading, Courtney Rowe, Lincoln’s spokeswoman, said today in an e-mailed statement. The plan “is a strong provision that will protect depositors and get banks back to the business of banking,” Rowe said. “These clarifications will clear up any questions that exist about the intent of the provision without compromising the legislation.” Under the proposed new language, during the phase-in federal banking agencies would have two years to determine the impact of the measure on mortgage lending, small business lending, jobs and capital formation. The proposal does not provide for any action after the study. The revised language being considered by Lincoln would clarify that banks with access to Federal Deposit Insurance Corp. deposit guarantees and the Federal Reserve’s discount lending window would be allowed to hold a separately capitalized swap dealer in an affiliate of the bank holding company . Reconciling the Bills The derivatives language is one part of the larger financial regulatory overhaul being completed this month by House and Senate negotiators, who will continue to meet this week to reconcile their bills. Congressional Democrats said they expect to have legislation ready for President Barack Obama’s signature by July 4. The proposal remains in its early stages and has not been presented to lawmakers, according to a Senate aide. Negotiators are currently scheduled to take up the derivatives language in the final days of the conference committee, the aide said, declining to be identified because the talks aren’t public. Lincoln, an Arkansas Democrat who is chairman of the Senate Agriculture Committee , in April proposed separating swaps trading from commercial banking. She has advocated for the rule in the face of opposition from federal regulators, lawmakers and banks. Dimon Lobbying The banking industry focused much of its lobbying efforts on removing the provision, including personal lobbying of lawmakers by JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon . Banking officials and regulators including Fed Chairman Ben Bernanke said the original proposal could introduce more risk into the system by eliminating a primary hedging mechanism and could restrict bank capital at a time of economic stress. Derivatives, such as stock options, are financial instruments based on the value of another security or benchmark. Some instruments, including contracts that insured mortgage- backed bonds, have been blamed for fueling a financial crisis that led to the worst recession since the Great Depression. Consumer advocates and labor groups — many of the same people who opposed Lincoln in the primary election battle she won last week — have supported the provision from its inception. Lincoln has picked up other high profile support in recent days, including from Federal Reserve Bank of Dallas President Richard Fisher and Thomas Hoenig , the president of the Federal Reserve Bank of Kansas City. To contact the reporter on this story: Phil Mattingly in Washington at pmattingly@bloomberg.net .

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AIG Rescue Spared European Banks From Raising $16 Billion, U.S. Panel Says

June 14, 2010

By Hugh Son June 14 (Bloomberg) — American International Group Inc. ’s U.S. government rescue spared European banks from raising as much as $16 billion in capital during the depths of the global financial crisis, according to a Congressional panel. ABN Amro Holding NV and Danske Bank A/S , Denmark’s biggest bank, were among the firms that bought the most derivatives from AIG to trim reserves they held against investment losses, the Congressional Oversight Panel said last week in a report . ABN Amro may have had to raise $3.5 billion if New York-based AIG was allowed to fail in 2008, and Danske Bank would have lost as much as $2.1 billion in relief, the panel wrote. The banks “would’ve needed to come to the capital markets in a time when it would’ve been nearly impossible to raise that kind of capital,” said Jonathan Hatcher , a Jefferies Group Inc. desk analyst and former Federal Deposit Insurance Corp. bank examiner. “This was point-blank regulatory arbitrage, AIG lending out its credit rating so institutions could hold less real capital.” The Federal Reserve Bank of New York weighed the consequences that an AIG failure would have on Europe’s largest financial institutions days before the September 2008 rescue, the panel said. The banks had bought credit-default swaps from AIG to cut the capital that regulators demanded be held against potential losses on about $250 billion in securities tied to mortgages and corporate debt, according to the report. ‘Catastrophic Market Disruptions’ The report shows which banks relied most on capital relief from the insurer. AIG had refused to disclose a list of the firms, according to the panel, which based its analysis on a document from the New York Fed with data as of Oct. 1, 2008. The insurer had named most of the banks, without disclosing the value of each firm’s coverage, in a confidential presentation to regulators as AIG appealed in early 2009 for its fourth rescue. AIG said then that its failure may lead to credit rating downgrades of the banks, which “could result in catastrophic market disruptions.” KFW Bank and Credit Logement SA each had $1.9 billion in capital relief protected by AIG’s rescue, the panel said. Credit Agricole SA’s Calyon had $1.6 billion, BNP Paribas SA had $1.5 billion and Societe Generale SA had $1 billion. Other unidentified firms had a total of $2.4 billion. “We entered into the contracts in order to get downside risk protection on our mortgage portfolio and thereby reduce risk-weighted assets,” said Peter Rostrup, chief risk officer at Danske Bank in Copenhagen. The capital relief was about $770 million, rather than the panel’s $2.1 billion estimate, Rostrup said. He said the panel’s analysis was based on assumptions that assign too much risk and that the company would have met capital requirements even without the AIG contracts. ‘Low Risk’ KFW’s contracts with AIG involved “low-risk senior tranches” of debt, and the use of the derivatives has declined in the past two years, the bank said in a statement Mark Herr , an AIG spokesman, declined to comment, as did representatives at BNP Paribas, Societe Generale and Credit Agricole. A spokeswoman for Royal Bank of Scotland Group Plc’s Netherlands unit, wasn’t immediately able to comment. RBS bought ABN Amro’s wholesale bank. Credit Logement Chief Financial Officer Eric Veyrent said last year that the firm “wouldn’t be directly touched by an AIG failure.” He didn’t immediately return a call yesterday outside of regular business hours. Two days before AIG’s Sept. 16, 2008, rescue, Timothy F. Geithner , then president of the New York Fed, was sent an e- mail from Alejandro LaTorre , an assistant vice president at the regulator, about the consequences a failure would have on European firms, according to the report. ‘Significant Problems’ “A bankruptcy filing had the potential to cause significant problems for numerous European banks” and could have led to their seizure by governments, said the panel, led by Harvard University law professor Elizabeth Warren . It is also possible that “some countries would have granted forbearance to their banks,” the panel said. Congress created the panel to oversee Treasury Department activities in stabilizing the economy and the $700 billion Troubled Asset Relief Program that bailed out firms including AIG. Geithner, 48, is now Treasury secretary. Goldman Sachs The so-called regulatory relief swaps are separate from the contracts tied to U.S. subprime mortgages that drained the insurer of cash in 2008, forcing a bailout that swelled to $182.3 billion. Goldman Sachs Group Inc. and Societe Generale were among the biggest counterparties in those transactions, which involved multisector collateralized debt obligations. As part of AIG’s third rescue, banks received payments in exchange for delivering the CDO assets linked to $62.1 billion in swaps. The securities were placed in a taxpayer-funded vehicle called Maiden Lane 3. The total size of European bank assets AIG protected shrank to $109.4 billion as of March 31, about 60 percent residential loans and the rest largely made of corporate debt, as some of the contracts expired. The average weighted duration of the swaps protecting residential loans is 31 years, while the span tied to corporate loans is about 5 years, AIG said in a May regulatory filing. AIG has said that it doesn’t expect to make payments tied to the European swaps. Banks that continue to get regulatory benefits from the derivatives may not terminate the contracts as early as expected, AIG said in the May filing. To contact the reporter on this story: Hugh Son in New York at hson1@bloomberg.net

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AIG Rescue Spared European Banks From Raising $16 Billion, U.S. Panel Says

June 14, 2010

By Hugh Son June 14 (Bloomberg) — American International Group Inc. ’s U.S. government rescue spared European banks from raising as much as $16 billion in capital during the depths of the global financial crisis, according to a Congressional panel. ABN Amro Holding NV and Danske Bank A/S , Denmark’s biggest bank, were among the firms that bought the most derivatives from AIG to trim reserves they held against investment losses, the Congressional Oversight Panel said last week in a report . ABN Amro may have had to raise $3.5 billion if New York-based AIG was allowed to fail in 2008, and Danske Bank would have lost as much as $2.1 billion in relief, the panel wrote. The banks “would’ve needed to come to the capital markets in a time when it would’ve been nearly impossible to raise that kind of capital,” said Jonathan Hatcher , a Jefferies Group Inc. desk analyst and former Federal Deposit Insurance Corp. bank examiner. “This was point-blank regulatory arbitrage, AIG lending out its credit rating so institutions could hold less real capital.” The Federal Reserve Bank of New York weighed the consequences that an AIG failure would have on Europe’s largest financial institutions days before the September 2008 rescue, the panel said. The banks had bought credit-default swaps from AIG to cut the capital that regulators demanded be held against potential losses on about $250 billion in securities tied to mortgages and corporate debt, according to the report. ‘Catastrophic Market Disruptions’ The report shows which banks relied most on capital relief from the insurer. AIG had refused to disclose a list of the firms, according to the panel, which based its analysis on a document from the New York Fed with data as of Oct. 1, 2008. The insurer had named most of the banks, without disclosing the value of each firm’s coverage, in a confidential presentation to regulators as AIG appealed in early 2009 for its fourth rescue. AIG said then that its failure may lead to credit rating downgrades of the banks, which “could result in catastrophic market disruptions.” KFW Bank and Credit Logement SA each had $1.9 billion in capital relief protected by AIG’s rescue, the panel said. Credit Agricole SA’s Calyon had $1.6 billion, BNP Paribas SA had $1.5 billion and Societe Generale SA had $1 billion. Other unidentified firms had a total of $2.4 billion. “We entered into the contracts in order to get downside risk protection on our mortgage portfolio and thereby reduce risk-weighted assets,” said Peter Rostrup, chief risk officer at Danske Bank in Copenhagen. The capital relief was about $770 million, rather than the panel’s $2.1 billion estimate, Rostrup said. He said the panel’s analysis was based on assumptions that assign too much risk and that the company would have met capital requirements even without the AIG contracts. ‘Low Risk’ KFW’s contracts with AIG involved “low-risk senior tranches” of debt, and the use of the derivatives has declined in the past two years, the bank said in a statement Mark Herr , an AIG spokesman, declined to comment, as did representatives at BNP Paribas, Societe Generale and Credit Agricole. A spokeswoman for Royal Bank of Scotland Group Plc’s Netherlands unit, wasn’t immediately able to comment. RBS bought ABN Amro’s wholesale bank. Credit Logement Chief Financial Officer Eric Veyrent said last year that the firm “wouldn’t be directly touched by an AIG failure.” He didn’t immediately return a call yesterday outside of regular business hours. Two days before AIG’s Sept. 16, 2008, rescue, Timothy F. Geithner , then president of the New York Fed, was sent an e- mail from Alejandro LaTorre , an assistant vice president at the regulator, about the consequences a failure would have on European firms, according to the report. ‘Significant Problems’ “A bankruptcy filing had the potential to cause significant problems for numerous European banks” and could have led to their seizure by governments, said the panel, led by Harvard University law professor Elizabeth Warren . It is also possible that “some countries would have granted forbearance to their banks,” the panel said. Congress created the panel to oversee Treasury Department activities in stabilizing the economy and the $700 billion Troubled Asset Relief Program that bailed out firms including AIG. Geithner, 48, is now Treasury secretary. Goldman Sachs The so-called regulatory relief swaps are separate from the contracts tied to U.S. subprime mortgages that drained the insurer of cash in 2008, forcing a bailout that swelled to $182.3 billion. Goldman Sachs Group Inc. and Societe Generale were among the biggest counterparties in those transactions, which involved multisector collateralized debt obligations. As part of AIG’s third rescue, banks received payments in exchange for delivering the CDO assets linked to $62.1 billion in swaps. The securities were placed in a taxpayer-funded vehicle called Maiden Lane 3. The total size of European bank assets AIG protected shrank to $109.4 billion as of March 31, about 60 percent residential loans and the rest largely made of corporate debt, as some of the contracts expired. The average weighted duration of the swaps protecting residential loans is 31 years, while the span tied to corporate loans is about 5 years, AIG said in a May regulatory filing. AIG has said that it doesn’t expect to make payments tied to the European swaps. Banks that continue to get regulatory benefits from the derivatives may not terminate the contracts as early as expected, AIG said in the May filing. To contact the reporter on this story: Hugh Son in New York at hson1@bloomberg.net

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Dylan Ratigan: Four Things Worth Supporting In Financial Reform Bill (VIDEO)

May 21, 2010

While the financial reform bill passed by the Senate does not address the root causes of the financial collapse, it’s not entirely worthless, according to Dylan Ratigan. During “The Dylan Ratigan Show” on Friday, Ratigan selected four of the most worthy features of the legislation and urged viewers to call on lawmakers to support them when the House and Senate meet to hash out the final language. Ratigan endorsed the following: Sen. Al Franken’s amendment regulating ratings agencies Called the “Restore Integrity To Credit Ratings,” Franken’s amendment would establish a regulatory board to select the credit rating firm that issues a security’s first credit rating. Sen. Susan Collins’ capital requirements Passed unanimously, Sen. Collins’ amendment would require regulators to take into account a financial institution’s risk when assessing capital requirements. Collins’ amendment would also set capital requirements for bank holding companies that would be as strict as those for insured banks, reports Reuters. Rep. Ron Paul’s partial ” Audit the Fed ” bill The bill, which ultimately became part of the House financial reform bill, calls for an audit of the Federal Reserve Board’s actions during the financial crisis. Federal Reserve Transparency Act. Sen. Blanche Lincoln’s ban on derivatives trading Lincoln’s amendment would force banks to spin-off their derivatives trading desks because of the role the financial products played in the financial crisis. WATCH: Visit msnbc.com for breaking news , world news , and news about the economy

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Citigroup Didn’t Say Morgan Stanley Was Short When Selling `Jackson’ CDO

May 21, 2010

By Bradley Keoun May 21 (Bloomberg) — Citigroup Inc. sold a series of mortgage-linked securities without disclosing that Morgan Stanley helped shape them while betting they would fail, two people with knowledge of the matter said. Marketing documents for the $205 million Jackson Segregated Portfolio, underwritten by Citigroup in 2006, don’t say who picked the underlying mortgage bonds. A Morgan Stanley unit helped select the bonds, the people said, speaking anonymously because the deal was private. Six of the seven series of Jackson bonds later defaulted, costing investors more than $150 million of losses, data compiled by Bloomberg show. “Failure to identify that there was a third party participating who would take a short position would have been extremely relevant to the purchaser of this product,” Duke University law professor James Cox said. Regulators have been scrutinizing Wall Street firms’ sales of subprime mortgage securities that later defaulted and contributed to the worst credit crisis since the Great Depression. They include some of the more than $500 billion of collateralized debt obligations, created by pooling mortgage bonds and other debt and packaging them into new securities, sold by Wall Street from 2005 through 2007. Citigroup did say in the Jackson marketing documents that its interests in the deal “may be adverse” to those of investors in the CDO’s bonds. SEC Vs. Goldman “We expressly disclosed in marketing the Jackson CDOs that the collateral selection may have included factors adverse to investors,” said Citigroup spokeswoman Danielle Romero-Apsilos . “Having said that, we remain committed to enhancing the transparency of all financial transactions in which we are involved.” Morgan Stanley spokesman Mark Lake said he couldn’t comment. Both banks are based in New York. The Securities and Exchange Commission last month accused Goldman Sachs Group Inc. of misleading investors by failing to disclose hedge fund Paulson & Co.’s role in picking collateral it bet against. Goldman Sachs calls the claims unfounded. Citigroup hasn’t been publicly accused of any violations tied to the Jackson deals. In a quarterly filing this month, Citigroup said it’s cooperating with “various formal and informal inquiries” into subprime-mortgage-related activities and is in talks to resolve some of them. $60 Billion of CDOs Citigroup sold $59.3 billion of CDOs from 2005 to 2007, according to a November 2008 report by Sanford C. Bernstein analyst Brad Hintz . In late 2008, the bank had to get a $45 billion bailout, partly because of losses on mortgage-backed securities that it kept for itself. Citigroup lost almost $30 billion in 2008 and 2009 before reporting a $4.43 billion profit in the first quarter. Citigroup sold the Jackson CDOs in August and September of 2006, data compiled by Bloomberg show, just as delinquency rates on U.S. subprime mortgages began to climb . The Jackson deal was a synthetic CDO, in which derivatives linked to mortgage bonds were pooled together and packaged into new bonds that could be sold to investors. On the other end of the derivatives was a “short” investor who would get paid if the underlying bonds soured. To get the deals done, most underwriters of synthetic CDOs initially took the short positions, sometimes with a plan to sell them off later. When Citigroup set up Jackson, it arranged with Morgan Stanley to take over the short positions once the deal closed, the people said. Citigroup allowed the firm to help select the bonds linked to the derivatives because Morgan Stanley would have a stake in the performance of the securities, they said. 80 Bonds There were 80 mortgage-backed bonds that in turn were underwritten by firms including Citigroup, Morgan Stanley, Lehman Brothers Holdings Inc., Bank of America Corp., JPMorgan Chase & Co. and Wachovia Corp., according to the marketing documents. Citigroup’s Citibank NA banking subsidiary was the initial short counterparty to the Jackson derivatives, according to the documents. The Jackson marketing documents said Citigroup might have information about the bonds or business relationships “that may or may not be publicly available or known to the other parties to the transaction,” and that the lender had no obligation to disclose “any such relationship or information.” The documents go on to say, “In no event will Citibank or any of its affiliates be deemed to have any fiduciary obligations to the holders of the notes.” Slashed to Junk Morgan Stanley was named in the Jackson marketing documents only as a currency-hedge provider for $35 million of euro- denominated securities. In April 2007, all seven series of the Jackson bonds were cut to junk grade by Moody’s Investors Service. Six of the seven later defaulted, wiping out 76 percent of investors’ principal, according to Bloomberg data. There’s no public data on the buyers of the securities, or on the performance of the Morgan Stanley unit that shorted the Jackson deals. In its suit against Goldman Sachs, the SEC said the bank’s disclosures for the Abacus 2007-AC1 CDO were misleading because they omitted Paulson’s role in selecting the underlying bonds. Goldman Sachs told investors that an independent manager, ACA Management LLC, picked the bonds. Goldman Sachs “misled investors by representing that ACA selected the portfolio without disclosing Paulson’s significant role in determining the portfolio and its adverse economic interests,” according to the SEC suit. Paulson wasn’t accused of wrongdoing. To contact the reporter on this story: Bradley Keoun in New York at bkeoun@bloomberg.net .

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Japanese Stocks Decline After Germany Restricts Short Selling; Honda Falls

May 18, 2010

By Masaki Kondo and Kotaro Tsunetomi May 19 (Bloomberg) — Japanese stocks fell after Germany’s move to halt a slump in European asset prices triggered a drop in the euro and crude oil. Honda Motor Co. , a Japanese carmaker that gets 81 percent of its sales abroad, retreated 1.5 percent after Germany’s financial regulator restricted naked short sales. Mitsubishi Corp. , a Japanese trading company that gets 41 percent of its sales from commodities, declined 1.4 percent. Mizuho Financial Group Inc. sank 1.8 percent after its U.S. counterparts led declines in the New York stock market. “Investors are afraid that Germany’s ban on naked trading will reduce people’s appetite for risk,” said Hiroichi Nishi , an equities manager in Tokyo at Nikko Cordial Securities Inc. “The weakening euro is worrying investors about Japanese exporters’ earnings.” The Nikkei 225 Stock Average declined 1.6 percent to 10,077.82 as of 9:01 a.m. in Tokyo. The broader Topix index fell 1.4 percent to 901.38, with all but one of its 33 industry groups slumping. The Nikkei 225 has lost 11 percent from a 52-week high on April 5 on concern a crisis of government debt from Greece to Spain will spill over to other European nations. A decline of 10 percent is the level some analysts refer to as a correction. The average price of stocks in the gauge is 18.8 times estimated earnings , near the lowest level since at least April 1. U.S. Futures Decline Futures on the Standard & Poor’s 500 Index slid 0.7 percent. The gauge declined 1.4 percent in New York yesterday after Germany’s BaFin financial-services regulator said it would introduce a temporary ban on naked short selling and naked credit-default swaps of euro-area government bonds starting at midnight. The ban will also apply to naked short selling in shares of 10 banks and insurers including Allianz SE and Deutsche Bank AG. Short selling involves the sale of borrowed securities in the hope of profiting by buying the securities later at a lower price and returning them to the owner. When securities are sold naked, the trader fails to borrow the assets before sending an order to sell. Investors own naked credit-default swaps when they don’t hold the bonds to which the derivatives are linked. The euro depreciated to 111.54 per yen today from 114.44 at the 3 p.m. close of stock trading in Tokyo yesterday. The dollar weakened versus the yen to 91.84 from 92.56. A stronger yen reduces the value of overseas sales at Japanese companies when converted into their home currency. Crude oil for June delivery extended its drop to a sixth session yesterday in New York and slid 1 percent to its lowest settlement since Sept. 29. To contact the reporter for this story: Masaki Kondo in Tokyo at mkondo3@bloomberg.net ; Kotaro Tsunetomi in Tokyo at ktsunetomi@bloomberg.net .

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SAFER: Passing the Lincoln Amendment Gets at a Root of the Crisis

May 17, 2010

In this letter to the Senate, a dozen prominent economists express their support of Section 716 of the Financial Reform Bill, which would Prohibit federal bailouts of swap & derivative dealers Dear Senators and staff: The undersigned members of the Economists’ Committee for Stable, Accountable, Fair and Efficient Financial Reform (S.A.F.E.R) strongly support the passage of the derivatives and swaps regulation sections of the Senate Financial Reform Bill and especially Section 716 (“Prohibition Against Federal Bailouts of Swaps Entities”). If the Senate fails to pass strict regulatory oversight over dangerous over-the-counter derivatives and swaps, then the U.S. economy will continue to be vulnerable to significant financial risks. Many economists agree that the unregulated, over-the-counter derivatives market played a key role in transforming a financial downturn into a global economic calamity. The derivatives regulation amendments that Senators Lincoln and Dodd have incorporated into the “Restoring Financial Stability Act of 2010″ bring a critically important measure of regulation over dangerous derivatives and swap products by requiring: exchange-trading and clearing of most standard derivatives; the prudential regulation of major swaps dealers, including capital reserves requirements and business conduct rules; the spinning off of risky swaps desks from the systemically risky banks; and giving regulators the ability to ban swaps that could lead to financial instability or have no economic purpose. Of significant importance is Section 716 (“Prohibition Against Federal Government Bailouts of Swaps Entities”) as part of the Dodd-Lincoln substitute to the “Restoring Financial Stability Act of 2010.” It, along with other structural reforms under consideration such as a statutory Volcker Rule (strengthened by the Merkley-Levin Amendment), will sharply reduce the possibility of taxpayer bailouts for speculative activity that does not serve the real economy. Section 716 is a flat ban on federal government assistance to “any swap entity,” especially in instances where that entity cannot fulfill obligations emanating from highly risky swaps transactions. Specifically, Section 716 bars “advances from any Federal Reserve credit facility, discount window…or [loan or debt guarantees by the] Federal Deposit Insurance Corporation.” Section 716 will require, the five largest swaps dealer banks to sever their swaps desks from the bank holding corporate structure. Those five banks are: Goldman Sachs, Morgan Stanley, J.P. Morgan Chase, Citigroup, and Bank of America–the institutions involved in well over 90 per cent of swaps transactions. Under Section 716 a “swaps entity” and a banking entity could not be contained within the same bank holding company, if the bank holding company has access to federal assistance. By quarantining highly risky swaps trading from banking altogether, federally insured deposits will not be put at risk by toxic swaps transactions. Moreover, banks will be forced to behave like banks, focusing on extending credit in a manner that builds economic strength as opposed to fostering worldwide economic instability. Finally, the spun-off swaps entity will be sufficiently isolated to permit the kind of careful prudential oversight mandated by Title VII of the Act as a whole. Title VII ensures that the spun-off entities will be regulated as institutions under the most rigorous prudential standards, and that almost all of the swaps instruments will be subject to standards for capital adequacy, full transparency, anti-fraud and anti-manipulation. Some prominent members of the Administration, including Sheila Bair, Chairman of the FDIC, have come out in opposition to section 716. Chairman Bair’s concern was that forcing derivatives dealers out of banks would move the business into less regulated and more leveraged entities. While saying that banks should not engage in speculative activities, she argued that banks have an important role in creating markets for their customers while needing to hedge interest rate risks related to their core lending business. Chairman Volcker, too, took the position that providing derivatives is a normal part of a banking relationship with a customer and should not be prohibited. These assertions are questionable. First, if banks’ roles in selling derivatives is crucial and part of the usual course of a banking relationship, why is it that only five banks – J.P. Morgan Chase, Citibank, Bank of America, Goldman Sachs and Morgan Stanley – account for 90 percent of the market? Surely that kind of oligopolistic domination of the market makes clear that it is not an activity normally undertaken by banks. Moreover, the level of concentration among swaps dealers is, in itself, systemically risky in addition to being anti-competitive. Second, separating swap dealing operations from the business of banking does not mean that banks will be unable to hedge their banking risks. They will become end users, and, as will be true of almost all other end users, they will use the exchange traded futures market to hedge risk. If the present Senate provisions pass, ninety per cent of this market will move from over-the-counter swaps trading to the more transparent and capitalized, exchange trading environment for futures contracts. That should leave these banks with much less dependence on the unregulated and risky over-the-counter swaps market, but, to the extent they participate therein, they will do so with an interest in seeing that the dealers from whom they buy derivatives are well managed, well regulated and well capitalized. In addition, the largest dealers will be able to retain what for them has been a major profit center, by moving their swaps desks into subsidiaries under the bank’s holding company. Their only loss will be the inability to sell and trade without disclosing the prices they charge, since most of their business will be conducted through clearinghouses and exchanges, and subject to requirements for disclosure and reporting that off-balance-sheet, over-the-counter markets are designed to evade. But third, and perhaps most important, the assumption that taking derivatives desks out of banks will make the business less regulated and more leveraged is simply wrong. For one thing, the requirements for prudential oversight under Title VII of the bill will apply standards for capital adequacy, transparency, anti-fraud and anti-manipulation to stand-alone derivatives dealers. But the equally important point is that they couldn’t possibly be less regulated and less well capitalized than the bank dealers are now. In sum, Chairman Lincoln’s provisions have the enormous value of getting the vast dealing and trading operations in derivatives out of the shadowy off-balance-sheet world where they are now posted by the large bank and investment bank dealers. This will have very substantial systemic benefits for the derivatives market and for the banking system as well. Moving the selling and trading of these instruments into separate entities will increase transparency by bringing derivatives out of the shadows so that dealers can be more easily regulated and the prices and volume of purchases and sales in the market will be readily available to counterparties. It will also ensure a better capitalized derivatives market since, as the crisis revealed, there is so little capital backing for the off-balance-sheet liabilities of the large banks where the majority of the business is still being conducted. In addition, it will shrink the enormous exposure of a few very large banks that can threaten the stability of other financial institutions and the many non-financial companies that use this market. In short, we urge you to defend the strict derivatives regulation language in the Senate Bill, including the important section 716. Sincerely, Dean Baker, Center for Economic and Policy Research William Black, University of Missouri, Kansas City James Crotty, University of Massachusetts, Amherst Jane D’Arista, University of Massachusetts, Amherst Gary A. Dymski, University of California, Riverside Gerald Epstein, University of Massachusetts, Amherst Tom Ferguson, Roosevelt Institute James K. Galbraith, University of Texas, Austin Ilene Grabel, University of Denver James Kwak, The Basline Scenario Robert Pollin, University of Massachusetts, Amherst Jennifer Taub, University of Massachusetts, Amherst Martin Wolfson, University of Notre Dame

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Robert Reich: Lincoln to the Rescue

May 11, 2010

Right now, the biggest battle in bank reform is over a provision introduced by Senator Blanche Lincoln of Arkansas that would force the giant Wall Street banks to give up their lucrative derivative trading businesses if they want the government (i.e. taxpayers) to continue insuring their commercial deposits. The five biggest Wall Street banks have had the derivatives market (derivatives are bets on whether the price of certain assets will rise or fall, bets thereby “derived” from asset prices) almost entirely to themselves. Last year their revenues from derivatives trading totaled a whopping $22.6 billion. Their advantage comes from their large size, plus government insurance of their commercial deposits that allows them to raise money more cheaply than other financial institutions. Derivatives lie at the point where the basic saving-and-lending function of commercial banking meets the private casino of Wall Street investment banking. You and I subsidize the biggest players in the casino who, precisely because we subsidize them, have grown too big to fail. The Glass-Steagall Act once prevented the casino from using commercial deposits, but since 1999, when Glass-Steagall was repealed, the game has exploded. That’s part of the reason the giants on Wall Street could make wild bets that ended up threatening the entire economy, costing millions of Americans their jobs and savings, and requiring a massive taxpayer-financed bailout. Lincoln wants to force the banks to put their derivatives into separate entities that aren’t subsidized by you and me. This is just common sense. Her move would also end the big banks’ monopoly over derivatives, thereby reducing their risk to the financial system. It would also cut dramatically into the big banks’ profits. Obviously, the big banks are apoplectic about Lincoln’s measure and will do almost anything to strip it from the Dodd bill. The banks have 130 registered lobbyists, countless unregistered ones, 40 former banking staffers, and at least one retired senator (Trent Lott) crawling over Capitol Hill, arguing that Lincoln’s provision would be the end of civilization as we know it. They also seem to have ensnared Paul Volcker. Late last week Volcker opined that commercial shouldn’t be barred from dealing in derivatives because derivatives are an important aspect of commercial banking; they hedge (that is, provide insurance against) risks associated with interest rates on loans. It’s an odd argument. If derivatives were as essential to the normal practice of lending as Volcker says, you’d expect every commercial bank to be dealing in them instead of just the five giant Wall Street behemoths. As to the risk you and I might be left holding the bag again, Volcker says not to worry: His own rule now contained in the Dodd bill, preventing bankers from making bets for their own accounts, would take care of that. But Volcker’s rule would not erode the giant banks’ monopoly over derivatives trading — making them too big to fail. By contrast, Lincoln’s provision, by pushing derivative trading out of commercial banking, would remove the big banks’ artificial advantage, resulting in more competition and a better capitalized derivatives market. Another argument being disingenuously used by Lincoln’s opponents is her measure would push derivative trading into unregulated shadow markets. That’s nonsense. Derivatives would have to be traded through a central clearinghouse or exchange, and every dealer in derivatives would still have to be registered and regulated by the Commodity Futures Trading Corporation or by the SEC. So what are Lincoln’s chances? All the big guns are aiming at her. Lobbyists are lined up against her. Republicans and many Democrats who want to do the Street’s bidding are eager to get rid of Lincoln’s measure. But she has two things going for her. First is the awkwardness for the White House if the President were to come out explicitly against her. For many weeks the Administration has talked about the importance of being tough on derivatives. The President has even said he’ll veto any bill that doesn’t go far enough regulating them. Now Lincoln is giving the White House a chance to prove its mettle or show itself to be pandering to the Street on one of the biggest reasons the Street almost melted down in the fall of 2008. The second advantage Lincoln has is her measure passed her committee with so much momentum — including the votes of every Democrat on the panel and one Republican — that it’s been included in Dodd’s overall financial reform bill. While it’s always possible for opponents of reform to hide when amendments are voted down, it’s much harder to hide when trying to strip a provision from a bill. Democrats who want to do so will have to join Republican Senators Judd Gregg, Saxby Chambliss, and Bob Corker, who already have introduced an amendment to accomplish this on behalf of their Wall Street patrons. The public will be able to identify which Senate Democrats care more about Wall Street’s campaign donations than the public good. Volcker has given these Democrats, and the White House, some cover. But the public is watching closely. Some cover may not be enough. Cross-posted from RobertReich.org

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Zach Carter: What’s Still Worth Fighting For On Wall Street Reform?

May 10, 2010

Last week, Congress decided it would not confront Too Big To Fail , the single gravest threat to our collective financial security. But there are still several key Wall Street reforms worth fighting for–reforms that must be enacted before the next crisis hits, with or without a big bank break-up. And fortunately, key Senators have authored amendments dealing with each one. Blanche Lincoln’s Derivatives Bill The most important fight from here on out is protecting the surviving elements of the derivatives bill crafted by Sen. Blanche Lincoln, D-Ark. The key reform in Lincoln’s bill would force big banks who deal derivatives to spin off those operations into separate companies. Derivatives are a breeding ground for straightforward gambling. For every $1 in legitimate risk-hedging in the derivatives market, there is $78 in speculative betting . That speculation is being backed by taxpayer perks–FDIC-insured deposits and Federal Reserve loans–that are supposed to support safe and productive lending, not reckless gambling. Lincoln would ban all federal backstops for this insanity, making the derivatives market less profitable, and therefore smaller, in the process. This element of Lincoln’s bill is already in the Senate legislation, but Sen. Judd Gregg, R-N.H., is pushing an amendment to gut this plan. Don’t let him get away with it. A vote for Gregg’s amendment is a vote for more– and more expensive– bank bailouts. The Volcker Rule The Volcker Rule has a similar aim to Blanche Lincoln’s derivatives plan. Economically essential banks shouldn’t be speculating with taxpayer money. The Volcker Rule would ban banks who receive Federal Reserve loans from conducting risky securities trades for their own accounts. Gambling with taxpayer money doesn’t help the economy in any way, it just produces short-term profits for banks while subjecting our tax dollars to long-term bailout risk. Whether the trades take the form of securities or derivatives, if they’re speculative, they shouldn’t be connected to the commercial banking system. Sens. Carl Levin, D-Mich., and Jeff Merkeley, D-Ore., have authored an amendment that would require regulators to implement the Volcker Rule banning proprietary securities trading at commercial banks. Audit The Fed The Federal Reserve is the chief bailout engine for the U.S. banking system, and it operates under conditions of almost complete secrecy. Since the crisis broke out, the central bank has pumped nearly $4.3 trillion into the nation’s banks, but the taxpayers on the hook for these loans know almost nothing about them. We don’t know who the Fed extended loans to, the terms of the loans, or what Fed officials signed off on them. This is a disgrace to democracy. Nowhere else in American government can public officials spend public money without detailed disclosure. Sen. Bernie Sanders, I-Vt., has authored a bill that would subject the central bank’s bailout operations to a thorough and public audit. A more comprehensive audit authored by Reps. Alan Grayson, D-Fla., and Ron Paul, R-Texas, passed the House late last year. Both are worth supporting. If the Sanders amendment cleared the Senate, the audit could be widened in a conference with the House. But any effort to hold the Fed accountable is better than none. Protect Consumers When President Barack Obama first put forward his Wall Street reform proposals in June 2009, the strongest provision was a plan to create an independent Consumer Financial Protection Agency (CFPA), whose sole charge was cracking down on abusive bank lending. Our current crop of regulators totally failed to perform this job over the past decade, as millions of foreclosure victims can attest to. Today’s bank regulators are charged with ensuring both bank profitability (a type of regulation known as “safety and soundness”) and that consumers are treated fairly. In practice, that has meant regulators ignore bank rip-offs, provided they create short-term profits. Unfortunately, Obama’s strong CFPA bill has been watered down over the course of nearly a year of negotiations. Instead of an independent agency, the current Senate bill would house the consumer regulator at the Federal Reserve, a regulator which had the authority to crack down on mortgage market abuses throughout the crisis, but failed to exercise it . What’s worse, the current Senate bill limits the scope of the new consumer regulator’s rule-writing authority, gives the existing, failed regulators veto power over those rules, and restricts the new regulator’s ability to enforce its rules. There was no good economic reason for the Senate to make any of these changes–they were all simply concessions to deep-pocketed bank lobbyists, nothing more, nothing less. Sen. Jack Reed, D-R.I., has an excellent amendment that would restore Obama’s original CFPA language, and provide real protection for consumers. Cap Leverage Banks amplify their bets by borrowing loads of money, a phenomenon called leverage. As the crisis unfolded in 2008, some banks found themselves with $40 or even $60 in borrowed money for every $1 of their own cash. That meant big profits while markets were moving up, but epic losses when markets started falling. The Senate must impose a hard cap on leverage to complement the 12-to-1 cap included in the Wall Street reform bill that cleared the House last year. The Brown-Kaufman amendment would have limited bank borrowing to $16.67 for every $1 of their own money. Brown-Kaufman also would have broken up the six largest U.S. banks, and was rejected in the Senate last week. The Senate should vote on the leverage cap as a stand-alone amendment.

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Stephen Herrington: Goldman Sachs Robbed the EU By Way of Greece

May 9, 2010

Membership in the EU comes at a price. That price is a limit on deficits. This aspect of the EU treaty was meant to insure the solvency of its member nations and so support the Euro currency itself. No member can unilaterally revalue its currency as it is, by treaty, an abstraction of the net worth of the various member’s ability to back it. This severely limits the unilateral options for dealing with sovereign debt by member countries, which in turn opened up unusual opportunities for member countries to be exploited by international banking. While there are treaty limits on debt incurred by member countries, there are no constraints on banks lending to them. What evolved in the Greek sovereign debt crisis is a massive short opportunity on the Euro, had you known it was developing. And who would know outside of Greek government and the banking and finance community like Goldman Sachs or JP Morgan? The early banking intercessions that propped up the appearance of Greek solvency were likely simple and direct exploitations of an economy in distress. The New York Times reported in February: Despite persistently high deficits, a 1996 derivative helped bring Italy’s budget into line by swapping currency with JPMorgan at a favorable exchange rate…In what amounted to a garage sale on a national scale, Greek officials essentially mortgaged the country’s airports and highways to raise much-needed money…A similar deal in 2000 called Ariadne devoured the revenue that the [Greek] government collected from its national lottery. These deals were undertaken as accounting camouflage for debt as a sale or leveraged investment to obtain or protect membership in the EU. In Greece’s case, it got out of control. Like a pay day loan operation, the debt deadlines were deferred again and again, and the practical cost of that debt is as unfathomable as the derivatives on which it was leveraged. It has been the most massive and sophisticated pay day loan scam in history. By treaty, the EU is now obligated to loan to and otherwise support the Greek government in order to keep it in the union. So by feeding the logarithmic debt appetite built on snowballing usurious opportunism by global banking, Greece became a liability for the entire EU. Now the errant child is in such duress that it must beg the more solvent siblings for a bail out. The question is, who would have loaned to Greece without the certainties of backstop involved in the EU treaty? Puts one in mind of the relationship between AIG and Goldman Sachs with the U.S.A. as guarantor of both of their counterparty positions. It’s a whole new business model contrived in the cauldrons of “financial innovation”. It operates with all the cravenness of the fabled Mexican jail. Take a hostage through peri-legal means in order to extort the family of the prisoner/hostage. Greece is the hostage and the EU is the family. Greece is not so much an example of a failed socialist philosophy as it is an example of exploitation as rich in deceit as was the defrauding of this nation’s pension and endowment funds with fraudulently rated securitized debt instruments. Greece’s debt may have remained under control except for the collusion of banking and Greek government that then ran afoul of EU treaty accounting misadventures. The lesson in this is that even socialists need to be mindful of pay day lenders in a global capitalist system that does not care about consequences other than personal profit. Greece needed a global consumer protection agency on the nation state scale. Someone will make money off of Greece’s bailout or default, and you can bet that Goldman Sachs has shorted the Euro.

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Former Fed Chairman Volcker Opposes Forcing Banks To Spin Off Swaps Desks

May 7, 2010

The establishment is lining up against Blanche Lincoln. As chairman of the Senate Agriculture Committee, the Arkansas senator authored a bipartisan bill to reform the derivatives market. Its centerpiece is a provision banning banks from also acting as derivatives dealers. Banking Committee Chairman Christopher Dodd (D-Conn.) incorporated Lincoln’s bill into the pending financial reform legislation. Because banks enjoy explicit taxpayer support through federal deposit insurance and access to cheap funds via the Federal Reserve’s discount lending window, Lincoln doesn’t want taxpayers to implicitly support derivatives dealing. Derivatives, traditionally used as a risk-management tool, amplified and exacerbated the financial crisis because their use was abused by firms that simply used them to place bets. This bound financial firms together in ways that weren’t fully understood until the height of the crisis, necessitating further taxpayer support. But her proposal, widely supported by reformers, has met fierce opposition from Wall Street, its supporters in the Senate and the Obama administration, including pro-reform voices like Paul Volcker and Sheila Bair. Wall Street argues that it’s too costly — forcing banks to spin off their derivatives desks into non-taxpayer supported affiliates compels firms to raise additional cash to support them. Bank regulators such as Federal Deposit Insurance Corporation Chairman Sheila Bair and Obama administration officials such as Timothy Geithner argue that it’s safer to keep swaps desks inside banks because bank regulation is tougher than the regulatory regime over nonbanks. Better to keep these units inside better-regulated institutions, they argue. Lincoln counters with an argument that resonates among reformers: let banks be banks. Dealing in derivatives and other complex securities should be left to investment firms and other specialists that don’t enjoy taxpayer protection. In short, taxpayers shouldn’t backstop speculation. But now, former Federal Reserve Chairman Paul Volcker has thrown his weight behind those trying to kill Lincoln’s proposal. “The provision of derivatives by commercial banks to their customers in the usual course of a banking relationship should not be prohibited,” Volcker wrote in a letter dated Thursday to Dodd, Geithner, and Sens. Shelby (R-Ala.), Merkley (D-Ore.), Levin (D-Mich.) and Lincoln. Volcker wrote that other parts of Dodd’s bill, plus an amendment by Merkley and Levin that attempts to rein in banks’ trading activities, sufficiently address his concerns about taxpayer-supported banks leveraging that support to speculate in the markets. His letter comes on the heels of comments made by Geithner during a Thursday appearance before the Financial Crisis Inquiry Commission. “When people look back at this crisis, when they look at the excessive risks taken by large financial institutions, the natural inclination is to move those risky activities elsewhere. To create stability, some argue, we should just separate banks from ‘risk.’ “But, in important ways, that is exactly what caused this crisis. “The lesson of this crisis, and of the parallel financial system, is that we cannot make the economy safe by taking functions central to the business of banking, functions necessary to help raise capital for businesses and help businesses hedge risk, and move them outside banks, and outside the reach of strong regulation,” Geithner said in his prepared remarks. It’s unclear how the issuance of anything beyond basic derivatives contracts that seek to minimize risk to fluctuations in interest rates, currency exchange rates, and commodity prices is “central to the business of banking.” READ Volcker’s letter below: Volcker Letter Regarding Lincoln Swaps Provision

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Former Fed Chairman Volcker Opposes Forcing Banks To Spin Off Swaps Desks

May 7, 2010

The establishment is lining up against Blanche Lincoln. As chairman of the Senate Agriculture Committee, the Arkansas senator authored a bipartisan bill to reform the derivatives market. Its centerpiece is a provision banning banks from also acting as derivatives dealers. Banking Committee Chairman Christopher Dodd (D-Conn.) incorporated Lincoln’s bill into the pending financial reform legislation. Because banks enjoy explicit taxpayer support through federal deposit insurance and access to cheap funds via the Federal Reserve’s discount lending window, Lincoln doesn’t want taxpayers to implicitly support derivatives dealing. Derivatives, traditionally used as a risk-management tool, amplified and exacerbated the financial crisis because their use was abused by firms that simply used them to place bets. This bound financial firms together in ways that weren’t fully understood until the height of the crisis, necessitating further taxpayer support. But her proposal, widely supported by reformers, has met fierce opposition from Wall Street, its supporters in the Senate and the Obama administration, including pro-reform voices like Paul Volcker and Sheila Bair. Wall Street argues that it’s too costly — forcing banks to spin off their derivatives desks into non-taxpayer supported affiliates compels firms to raise additional cash to support them. Bank regulators such as Federal Deposit Insurance Corporation Chairman Sheila Bair and Obama administration officials such as Timothy Geithner argue that it’s safer to keep swaps desks inside banks because bank regulation is tougher than the regulatory regime over nonbanks. Better to keep these units inside better-regulated institutions, they argue. Lincoln counters with an argument that resonates among reformers: let banks be banks. Dealing in derivatives and other complex securities should be left to investment firms and other specialists that don’t enjoy taxpayer protection. In short, taxpayers shouldn’t backstop speculation. But now, former Federal Reserve Chairman Paul Volcker has thrown his weight behind those trying to kill Lincoln’s proposal. “The provision of derivatives by commercial banks to their customers in the usual course of a banking relationship should not be prohibited,” Volcker wrote in a letter dated Thursday to Dodd, Geithner, and Sens. Shelby (R-Ala.), Merkley (D-Ore.), Levin (D-Mich.) and Lincoln. Volcker wrote that other parts of Dodd’s bill, plus an amendment by Merkley and Levin that attempts to rein in banks’ trading activities, sufficiently address his concerns about taxpayer-supported banks leveraging that support to speculate in the markets. His letter comes on the heels of comments made by Geithner during a Thursday appearance before the Financial Crisis Inquiry Commission. “When people look back at this crisis, when they look at the excessive risks taken by large financial institutions, the natural inclination is to move those risky activities elsewhere. To create stability, some argue, we should just separate banks from ‘risk.’ “But, in important ways, that is exactly what caused this crisis. “The lesson of this crisis, and of the parallel financial system, is that we cannot make the economy safe by taking functions central to the business of banking, functions necessary to help raise capital for businesses and help businesses hedge risk, and move them outside banks, and outside the reach of strong regulation,” Geithner said in his prepared remarks. It’s unclear how the issuance of anything beyond basic derivatives contracts that seek to minimize risk to fluctuations in interest rates, currency exchange rates, and commodity prices is “central to the business of banking.” READ Volcker’s letter below: Volcker Letter Regarding Lincoln Swaps Provision

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Ex-Bear Stearns Chief Splits With Wall Street, Endorses Regulating Derivatives

May 5, 2010

The former chief executive officer of failed investment bank Bear Stearns endorsed Congress’s push to mandate federal re-regulation of derivatives. Testifying Wednesday before the Financial Crisis Inquiry Commission, former Bear CEO Alan Schwartz said that moving derivatives onto clearinghouses and exchanges — something under debate in the Senate — would be a “very positive development,” particularly for those wishing to accurately assess financial firms’ balance sheets. The vast majority of derivatives are traded over the counter, meaning they’re essentially traded in the shadows between firms without government oversight or regulation. In fact, no one really has an accurage assessment of how big the market truly is. In December, the House of Representatives passed a measure calling for the majority of these derivatives to be moved onto clearinghouses — venues that act as a nexus for trades and require various safeguards to be in place — and exchanges, which function much like a stock exchange. The Senate’s version of the bill passed out of the chamber’s Banking and Agriculture committees, and is presently under consideration on the Senate floor. While many on Wall Street are actively fighting to weaken the derivatives proposal, the endorsement from one of the former heads of what was once a top five investment firm could give reformers added ammunition. Schwartz’s former competitors — those still standing, at least — are vigorously fighting the proposals. In March 2008, JPMorgan Chase acquired Bear Stearns in a sweetheart deal at the urging of the Treasury Department and Federal Reserve. The Fed’s regional bank in New York, then led by current Treasury Secretary Timothy Geithner, provided the taxpayer-supported financing to get JPMorgan to agree to the deal. Lehman Brothers failed six months later. Merrill Lynch was acquired by Bank of America. Goldman Sachs and Morgan Stanley converted from investment banks into bank-holding companies.

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FDIC Head Sheila Bair: Let Banks Keep Derivatives

May 1, 2010

WASHINGTON — A top government banking regulator wants Senate Democrats to let banks keep most of their business in complex – and profitable – securities known as derivatives. A sweeping overhaul of banking regulations pending in the Senate would require banks to spin off their derivatives business. Sheila Bair, the chairwoman of the Federal Deposit Insurance Corp., said that provision could shift the creation of derivatives contracts outside the reach of regulators. “If all derivatives market-making activities were moved outside of bank holding companies, most of the activity would no doubt continue, but in less regulated and more highly leveraged venues,” Bair wrote in a letter to Senate Banking Committee chairman Christopher Dodd, D-Conn., and Agriculture Committee Chairwoman Blanche Lincoln, D-Ark. A copy of the letter was obtained by the Associated Press. The derivatives measure, pushed by Lincoln, would require banks to set up separate subsidiaries, with their own source of capital, to run what has been a highly profitable derivatives business. Derivatives are the exotic speculative and risk-hedging instruments blamed for helping plunge Wall Street into a near meltdown in 2008. The Obama administration has also indicated it does not support the provision. The FDIC is at least the second bank overseer to oppose the ban. Federal Reserve officials, in a letter to senators, also have called on the Senate to remove the spin-off requirement. Dodd agreed to keep that restriction after negotiating with Lincoln last weekend. The decision stunned the bank industry, which immediately mobilized to get it removed. But even if that provision is ultimately removed, there is bipartisan support for restricting banks from trading in derivatives with their own accounts for purely speculative purposes. Indeed, in her three-page letter, Bair said that neither banks nor bank holding companies should engage in speculative derivatives trading. But she said banks have a legitimate need of derivatives to help them hedge against interest rate fluctuations. Moreover, she said, banks “play an essential role” creating markets for commercial firms that enter into derivatives contracts to manage their risks. The value of derivatives depends on the price of some underlying asset. Corn futures and stock options are examples of some of the simpler derivative products. Bair said that even if banks created subsidiaries for their derivatives business, those entities would be outside the FDIC’s scrutiny. “We do not have the same comprehensive backup authority over the affiliates of banks as we do with the banks themselves,” she wrote. Representatives from Dodd’s and Lincoln’s offices were not immediately available to comment.

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FDIC Head Sheila Bair: Let Banks Keep Derivatives

May 1, 2010

WASHINGTON — A top government banking regulator wants Senate Democrats to let banks keep most of their business in complex – and profitable – securities known as derivatives. A sweeping overhaul of banking regulations pending in the Senate would require banks to spin off their derivatives business. Sheila Bair, the chairwoman of the Federal Deposit Insurance Corp., said that provision could shift the creation of derivatives contracts outside the reach of regulators. “If all derivatives market-making activities were moved outside of bank holding companies, most of the activity would no doubt continue, but in less regulated and more highly leveraged venues,” Bair wrote in a letter to Senate Banking Committee chairman Christopher Dodd, D-Conn., and Agriculture Committee Chairwoman Blanche Lincoln, D-Ark. A copy of the letter was obtained by the Associated Press. The derivatives measure, pushed by Lincoln, would require banks to set up separate subsidiaries, with their own source of capital, to run what has been a highly profitable derivatives business. Derivatives are the exotic speculative and risk-hedging instruments blamed for helping plunge Wall Street into a near meltdown in 2008. The Obama administration has also indicated it does not support the provision. The FDIC is at least the second bank overseer to oppose the ban. Federal Reserve officials, in a letter to senators, also have called on the Senate to remove the spin-off requirement. Dodd agreed to keep that restriction after negotiating with Lincoln last weekend. The decision stunned the bank industry, which immediately mobilized to get it removed. But even if that provision is ultimately removed, there is bipartisan support for restricting banks from trading in derivatives with their own accounts for purely speculative purposes. Indeed, in her three-page letter, Bair said that neither banks nor bank holding companies should engage in speculative derivatives trading. But she said banks have a legitimate need of derivatives to help them hedge against interest rate fluctuations. Moreover, she said, banks “play an essential role” creating markets for commercial firms that enter into derivatives contracts to manage their risks. The value of derivatives depends on the price of some underlying asset. Corn futures and stock options are examples of some of the simpler derivative products. Bair said that even if banks created subsidiaries for their derivatives business, those entities would be outside the FDIC’s scrutiny. “We do not have the same comprehensive backup authority over the affiliates of banks as we do with the banks themselves,” she wrote. Representatives from Dodd’s and Lincoln’s offices were not immediately available to comment.

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Goldman, JPMorgan Credit Risk Rises as Senate Weighs Bank Bill, Swaps Show

April 26, 2010

By Shannon D. Harrington April 26 (Bloomberg) — The cost to protect the debt of Goldman Sachs Group Inc. , Morgan Stanley , JPMorgan Chase & Co. and two other derivatives dealers jumped for the fourth day as the U.S. Senate considers a bill that may curb their trading revenue. Credit-default swaps on Goldman Sachs, the bank facing fraud allegations from the U.S. Securities and Exchange Commission, jumped to the highest in almost a year. Contracts on Morgan Stanley and Bank of America’s Merrill Lynch unit reached the highest since August, and JPMorgan swaps climbed the most in more than 11 weeks. The legislation would damp one of Wall Street’s most profitable businesses, in which Goldman, JPMorgan, Bank of America, Morgan Stanley and Citigroup Inc. earned an estimated $28 billion in revenue last year, according to filings with the Federal Reserve and people familiar with their income sources. The Senate is set to hold a test vote today on legislation that would force the most actively traded derivatives to exchanges or trading platforms that resemble exchanges, mandate banks to hold more capital on other derivatives trades and require commercial banks to wall off swaps trading desks. “You’re talking about a pretty significant contributor to earnings,” said Alexander Yavorsky , a senior analyst at Moody’s Investors Service in New York. “If they lost a material portion of that, it obviously wouldn’t be good. The problem with exchange trading for dealers is that they would be giving up profits without a concomitant decrease in risk to compensate for it.” Senator Richard Shelby , a lead negotiator on the financial- reform bill, said Republicans will block Democrats’ efforts to begin debate on the measure in a test vote today. Hearing Tomorrow Five-year credit-default swaps on Goldman jumped 22 basis points to 166 basis points as of 12:12 p.m., according to broker Phoenix Partners Group. That’s the highest since May 2009, CMA DataVision prices show. The Senate Permanent Subcommittee on Investigations is set to question Goldman Chairman and Chief Executive Officer Lloyd Blankfein and six current and former employees of the firm tomorrow. The SEC says Goldman Sachs and executive director Fabrice Tourre misled investors in a 2007 collateralized debt obligation about the role played by hedge fund Paulson & Co., which bet the CDO would collapse. Goldman swaps have jumped 75 basis points since April 15, the day before the SEC announced its fraud suit. Swaps on JPMorgan climbed 15 basis points to a mid-price of 87.5 basis points, the most since Feb. 4, CMA prices show. Morgan Stanley swaps jumped 32 to 182.5. Contracts on Merrill rose 34.5 to 190.5 and Bank of America swaps increased 35 to 160, CMA prices show. Markit CDX Index Swaps on Citigroup Inc. rose 22.5 basis points to a mid- price of 184.5, Phoenix prices show. A benchmark indicator of U.S. corporate credit risk rose to the highest in two months. Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt. Credit-default swaps on the Markit CDX North America Investment Grade Index Series 14, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, climbed 1.1 basis point to a mid-price of 89.96 basis points as of 12:40 p.m. in New York, according to index administrator Markit Group Ltd. To contact the reporter on this story: Shannon D. Harrington in New York at sharrington6@bloomberg.net

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Senators Send Letter To Harry Reid Urging Strong Derivatives Reform

April 25, 2010

A bipartisan coalition of Senators concerned about weak oversight of derivatives sent a letter to Senate Majority Leader Harry Reid urging him to strengthen the current financial reform bill and resist efforts to weaken it. The letter, dated Friday, details 11 principles the Senators hope the final bill will incorporate. Derivatives — financial instruments that derive their value from other financial instruments — are used to hedge against risk, like rising interest rates or fluctuations in currency prices. Largely unregulated, they’re also used to create financial securities out of thin air (a bet on a bet on a bet, for instance), and they’re used to make bets without parties needing to front the necessary cash. It’s the implosion of these that contributed to the worst financial crisis and economic downturn since the Great Depression. The Senate is expected to begin debating the main bill, authored by Banking Committee Chairman Christopher J. Dodd, this week. A complementary bill, authored by Agriculture Committee Chairman Blanche L. Lincoln, which has jurisdiction over the Commodity Futures Trading Commission, which regulates some derivatives products, is largely viewed as the stronger of the two bills. The bipartisan coalition wants the final bill to incorporate the strongest provisions from the two measures, or at the very least adopt Lincoln’s bill as the derivatives section of the final product. The bill authored by Lincoln, of Arkansas, shines more light on megabanks’ derivatives operations than the bill put forward by Dodd, of Connecticut, experts say. “If we are to effectively regulate the derivatives market, we must start the Senate floor debate with the strongest proposal we can craft and defend against the inevitable attempts to weaken it — rather than rely upon later amendments to add essential reforms,” the letter reads. “Starting the amendment process from a position of weakness is no way to start.” Among the provisions the seven Senators hope the final bill will feature are tougher rules requiring parties to trade on regulated exchanges and exchange-like facilities, mandated collateral-posting requirements so parties put cash on the table when making their bets, position limits to prevent market manipulation (which also could deter wild swings in prices for commodities that don’t reflect the underlying economic situation), and a requirement that derivatives dealers be legally compelled to act in the best interests of their pension fund, university endowment and state and local government customers. Derivatives dealers, like Goldman Sachs and JPMorgan Chase, currently are not legally required to act in the best interests of their customers. “We urge a constructive process in which the strongest provisions of each bill are combined into a proposal to reform the derivatives market that is more effective than either current proposal, and is supported by both Chairmen,” the letter states. “In the absence of such an agreement, we would find it difficult to support comprehensive reform legislation unless the best provisions of the Agriculture Committee’s bill were included as the derivatives title of the legislation.” The letter is signed by Republican Olympia J. Snowe of Maine, and Democrats Dianne Feinstein of California, Bill Nelson of Florida, Tom Harkin of Iowa, Maria Cantwell of Washington, Byron L. Dorgan of North Dakota, and Sherrod Brown of Ohio. Read the letter below: Letter to Senate Majority Leader Reid Regarding Derivatives

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Derivatives Convention-Goers Worry About Reform, Relax At Bondage Club

April 23, 2010

SAN FRANCISCO — By day, they dealt with risk. At night, it got risqué. Financiers, lawyers, traders and accountants gathered this week at the annual International Swaps and Derivatives Association conference here to discuss “Collateralization and Netting — the Impact” and “Systemic Risk: Advances and Challenges in the Wake of the Crisis.”

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Obama Says He’ll Veto Finance Measure Without Stronger Derivatives Rules

April 16, 2010

By Hans Nichols and Roger Runningen April 16 (Bloomberg) — President Barack Obama said he would veto any legislation to overhaul U.S. financial regulations if it doesn’t include new rules on the derivatives market. “We can’t allow history to repeat itself,” Obama said at the start of a meeting with his panel of outside economic advisers. “I will veto legislation that does not bring the derivatives market under control in some sort of regulatory framework that assures that we don’t have the same kind of crisis that we’ve seen in the past,” he said. The session with a panel of business and labor leaders and economists, headed by former Federal Reserve Chairman Paul Volcker , was being held at the White House as the Senate is gearing up to debate a bill to revamp financial regulations. The White House meeting began hours after the Securities and Exchange Commission sued Goldman Sachs Group Inc. , saying the company misstated and omitted key facts about collateralized debt obligations tied to subprime mortgages, financial instruments that contributed to the worst financial crisis since the Great Depression. Obama made no mention of the case in highlighting his effort to impose new rules on Wall Street. ‘Army of Lobbyists’ Opponents of the legislation have drafted “an army of lobbyists” who have found some willing allies in Congress who are trying to “carve out a lot of exceptions and special loopholes so that folks on Wall Street will keep making these risky bets without any oversight,” Obama said. Volcker, an advocate of tightening rules for banks, said he thought “things are coming together” in support for the financial overhaul legislation. He didn’t elaborate. The White House meeting is intended, in part, to add momentum to the administration’s effort to get through Congress legislation revamping the nation’s financial regulations, including those governing the $605 trillion over-the-counter derivatives market. It was the second time this week that Obama has put the measure at the center of his public agenda. The chief vehicle is a bill sponsored by Senate Banking Committee Chairman Christopher Dodd that would create a consumer-protection bureau, ban proprietary trading at banks, and set up a mechanism to enable the government to dismantle failed firms. Republican congressional leaders are trying to keep their party unified in opposition to the administration’s proposals. They have dubbed the legislation “the bailout bill” because it grants the federal government authority to unravel institutions whose failure threatens the financial system. Republican Opposition “Despite President Obama’s rhetoric, his permanent bailout bill gives Goldman Sachs and other big Wall Street banks a perpetual, taxpayer-funded safety net by designating them ‘too big to fail,’” House Minority Leader John Boehner , an Ohio Republican, said in a statement today. Today’s meeting of Obama’s Economic Recovery Advisory Board was primarily focusing on ways to bolster U.S. economic growth and job creation as well as Obama’s goal to double exports in five years. Jim Owens , chairman and chief executive of Caterpillar Inc. and a member of Obama’s panel, said the export business of the world’s largest maker of bulldozers and excavators is up, and he will be hiring more workers for that business. Obama said his administration is reviewing U.S. export controls that are “outdated” and causing the U.S. to lose business. To contact the reporters on this story: Hans Nichols in Washington at Hnichols2@bloomberg.net ; Roger Runningen in Washington at rrunningen@bloomberg.net

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SEC Probes Derivatives Use By Hedge Funds

March 26, 2010

Derivatives, the complex instruments traded in a $600 trillion global market and blamed for playing a role in the financial crisis, have come under heightened scrutiny in the U.S. and Europe. Particular attention is being focused on credit default swaps, a form of insurance against loan defaults, which account for about 10 percent of the derivatives market. SEC Chairman Mary Schapiro has called for Congress to impose new oversight on derivatives, warning that allowing risky instruments like the swaps to continue unfettered could bring further economic damage. Federal regulation of the derivatives market is included in sweeping legislation to overhaul financial regulation that passed the House in December and also is included in a new Senate bill. “Although the use of derivatives by funds is not a new phenomenon, we want to be sure our regulatory protections keep up with the increasing complexity of these instruments and how they are used by fund managers,” Andrew Donohue, director of the SEC’s investment management division, said in a statement. “This is the right time to take a step back and rethink those protections.” The SEC review will examine, among other things, whether funds’ use of derivatives is consistent with rules for concentration of assets and risk management, and whether fund directors are adequately overseeing their use. Exchange-traded funds trade like stocks but mirror other assets such as stock indexes or commodities. Unlike traditional mutual funds, ETF shares can be traded throughout the day. Conventional ETFs track a market index such as the Standard & Poor’s 500. So-called leveraged ETFs seek to deliver multiples of an index or benchmark, often in volatile areas like commodities or currencies that involve derivatives.

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S.E.C. Reviews Derivative Use by Some Funds

March 26, 2010

NYT – The Securities and Exchange Commission announced Thursday that it was reviewing the use of swaps and other derivatives by mutual funds, exchange-traded funds and other investment products that are often marketed to individual investors, Edward Wyatt of The New York Times reports. The review has been prompted by what appears to be a growing number of funds, particularly exchange-traded funds, that have sought to use derivatives to provide outsized returns rather than simply track the performance of a market index. Read Complete Article Tags: Syndicated Related posts No related posts.

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AIG Said to Cut Bonuses to Ex-Workers by $21 Million to Meet Feinberg Goal

March 14, 2010

By Hugh Son March 15 (Bloomberg) — American International Group Inc. , the bailed-out insurer, cut retention bonuses to be delivered to former employees today by about $21 million to meet a target imposed by U.S. paymaster Kenneth Feinberg , said a person briefed on the company’s plans. AIG will give a total of $46 million to about 70 recipients, a reduction of about one-third from what the New York-based firm originally promised, said the person, who declined to be identified because the payments were private. Some of the former workers from the company’s Financial Products unit are getting smaller bonuses because they took new jobs last year after departing AIG, said the person. “Under certain circumstances, the employee retention program allows them to offset income from other employers,” said Andrew Goodstadt , a partner at Thompson Wigdor & Gilly LLP who said he represents about a dozen of the AIG workers. “I trust AIG will comply with their contractual obligations.” AIG is seeking to satisfy Feinberg’s demand that the derivatives staff return $45 million they pledged to give back after a March 2009 backlash against the awards. The company needed a final $5 million in concessions after current employees opted to receive smaller bonuses in exchange for getting the cash weeks in advance of today’s deadline. Some departed workers rebuffed requests to cut their payouts, the person said. AIG may have surpassed its U.S.-imposed target, absent legal challenges from bonus recipients, the person said. Feinberg, the Obama administration’s special master for executive compensation, has say over some AIG pay because the insurer took a $182.3 billion bailout from the government. Feinberg’s Jurisdiction AIG needs to reach the goal to be allowed to raise salaries for top-earning employees under Feinberg’s jurisdiction, the U.S. Treasury Department has indicated to the insurer. The paymaster may disclose his 2010 compensation determinations for the 25 highest-paid AIG employees this month. Feinberg didn’t return a call or e-mail for comment late yesterday. The insurer handed out about $105 million in retention awards in February to about 200 current Financial Products workers, most of whom agreed to bonus cuts of 10 percent, the person said. AIG employees who were terminated last year were still entitled to their retention awards. While former employees had been asked to accept cuts of 20 percent, most had refused, the person said. Gainfully Employed The insurer responded by mailing questionnaires to ex- workers this month asking whether they’d earned income after leaving AIG. Under the program, compensation earned by former AIG staff last year from another employer would lower payouts to be delivered today. Christina Pretto , an AIG spokeswoman, declined to comment. The employees receiving the bonus awards worked in the Financial Products unit blamed for losses that pushed AIG to the brink of collapse in September 2008. The insurer committed more than $450 million to retain Financial Products workers needed to unwind derivative bets. In 2008 and 2009, AIG gave a combined total of more than $200 million, including $168 million in March of last year that was criticized by lawmakers. Employees pledged to return $45 million last year amid the backlash. When they fulfilled only $19 million of that promise, Feinberg demanded that AIG workers forgo the remaining $26 million when they got their 2010 awards. AIG said last month that it was overhauling its incentive system to reward employees for performance. A backlash against AIG’s bonuses for employees in the derivatives unit peaked in March of last year with President Barack Obama criticizing the awards. Feinberg, 64, formerly oversaw the September 11th Victim Compensation Fund. He is responsible for setting pay at firms including Chrysler Group LLC, GMAC Inc. and AIG that were among the top recipients of bailout funds. To contact the reporter on this story: Hugh Son in New York at hson1@bloomberg.net .

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New York City May Get as Much as 13 Inches of Snow Starting Early Thursday

February 24, 2010

By Brian K. Sullivan Feb. 24 (Bloomberg) — The National Weather Service boosted its forecast for tomorrow’s snowstorm in New York City, saying that as much as 13 inches may fall and that travel in the region may be “very hazardous or impossible.” A winter storm warning goes into effect at 6 a.m. tomorrow. It calls for 7 to 13 inches (18 to 33 centimeters), up from earlier predictions of 5 to 10 inches, according to a weather service bulletin . The storm may be accompanied by wind gusts as high as 30 mph before it abates about 36 hours later. “Expect the steadiest and heaviest snow to fall from mid- morning Thursday through Thursday evening,” according to the statement. “Snow may mix with rain for brief periods of time on Thursday. If no mixing-in occurs, amounts will be up towards the higher end of the range, if not more.” The storm is the latest in an El Nino-driven weather pattern that has pushed moist air across the southern U.S., where it has mixed with colder air coming down from the Arctic, said Matt Rogers , president of private forecaster Commodity Weather Group in Bethesda, Maryland. The result has been record-breaking seasonal snows from Washington to Philadelphia. El Nino is a warming of the Pacific Ocean that occurs every two to five years and lasts about 12 months. Flights Canceled Continental Airlines Inc. , the fourth-largest U.S. carrier, canceled all flights tomorrow from Newark Liberty International Airport by regional partners including Continental Express and Pinnacle Airlines Corp.’s Colgan unit, said Mary Clark , a spokeswoman for the Houston-based carrier. The cancellations involve “several hundred” flights, Clark said. She didn’t immediately have a more specific number. Delta Air Lines Inc. , the world’s largest carrier, scrubbed 65 flights in the New York area for tomorrow, said Susan Elliott , a spokeswoman for the Atlanta-based company. UAL Corp. ’s United Airlines scrapped 70 flights today because of weather and is “still evaluating our plan for tomorrow,” said Sarah Massier, a spokeswoman. Amtrak canceled 8 trains for tomorrow on its Empire Service lines in the upstate New York area, said a spokeswoman, Karina Romero . A winter storm warning, meaning heavy snow, ice and freezing rain are imminent, has been issued from Maryland to Maine, according to the weather service. In northern New Jersey , as much as 18 inches of snow may fall, the agency said. ‘Strong Winds’ Possible “Strong winds are also possible,” the weather service statement for New York and New Jersey said. “This will make travel very hazardous or impossible.” In Massachusetts, southern New Hampshire, Rhode Island and Connecticut, where as much as 3 inches of rain may fall, flood watches have been issued. “It is a really complicated system, it is like a three- part deal,” Rogers said. “It is definitely going to be what they call a bomb in meteorology.” Tomorrow’s snow will be from the second storm to hit the area this week. A system brought rain to New York City and almost two feet of snow to western Massachusetts starting yesterday, disrupting air traffic in Newark, Boston, Baltimore and New York. “The Northeast is being impacted by one storm now, and the monster storm is going to impact the region tomorrow into Friday,” Eric Wilhelm of private forecaster AccuWeather.com . said earlier today. “A really complex situation is developing in the Northeast.” Power Failures Likely On the Massachusetts coast, sustained winds of 30 mph are expected with gusts as intense as 50 mph, according to a weather service high wind watch issued for the area. “There could be real problems with power outages,” Wilhelm said. “That could be the real legacy of this storm.” More than 50,000 customers in the Albany area and western Massachusetts are already without power from the storm moving north through New England today, according to utilities. High winds may also create wind-chill problems that will drive energy consumption, Rogers said. Temperatures in the region are expected to be in the 30s Fahrenheit, while the wind will make it feel colder. Demand for heating oil may be 8 percent above normal through March 3, according to Weather Derivatives , a Belton, Missouri, forecaster. Heating oil for March delivery rose 0.98 cent, or 0.5 percent, today to settle at $2.0421 a gallon on the New York Mercantile Exchange. Snowfall for Washington The Washington-Baltimore corridor has the potential to receive as much as 5 inches of snow in the storm, according to Brandon Peloquin, a weather service meteorologist in Sterling, Virginia . “There is some uncertainty with this storm,” Peloquin said by telephone. “There is some wiggle room. The track is critical.” The storms will add to what’s already been a benchmark winter in the eastern U.S., where seasonal snowfall records were broken in Washington and Baltimore. Most of that snow has melted away, Peloquin said. The heavy snow will taper off the day after tomorrow, although snow flurries and clouds will linger over much of the Northeast through the weekend, Wilhelm said. To contact the reporter on this story: Brian K. Sullivan in Boston at bsullivan10@bloomberg.net ;

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Bankers’ Stew Disguising CDO Scraps as Tasty Morsels: Book Excerpt

February 9, 2010

By Mark Gilbert Feb. 9 (Bloomberg) — Since its inception, the derivatives market has echoed the fairground hawkers’ call to “scream if you want to go faster.” Among the new derivatives, collateralized-debt obligations (CDOs) were particularly hot. To make a CDO, bankers bundle together a package of other kinds of securities, such as corporate bonds, asset-backed securities (ABSs) or credit-default swaps (CDSs) that are tied to company creditworthiness or mortgage performance. By carving the resulting collections into slices of differing quality, the creators can make the riskiest portions absorb any losses on the underlying assets first, thereby cushioning the higher-rated slices. No Clear Idea As with almost every other investment vehicle, CDOs were designed to reward investors according to the amount of risk they took. Those who bought lower-risk securities typically earned a smaller rate of return from successful investments than did those who took bigger risks, who received either a larger payoff if the investment performed well or nothing at all if the investment failed. Trouble was, no one had a clear idea of just how risky any given slice was or any sense of how to quantify and value that risk. In the same way that Liverpudlians disguise overripe meat and vegetables by cooking them to mush in a stew called scouse, investment banks, rating companies and plain old market peer pressure turned the investments inside most CDOs from inedible chunks of the financial markets into bite-size morsels palatable to pension fund trustees. No pension fund — and only a few other investors — would buy a structured transaction whose worth depends on what happens to the stock market and company creditworthiness, which way commodity prices go and whether the wind blows on a Sunday. They did, however, happily purchase CDOs that offered strong credit ratings and the promise of top-flight returns. Risk Appetite For the game to work, everyone involved had to turn a blind eye to the less-than-stellar track record assembled by the rating companies that assessed CDOs. And they did — until CDOs’ poor performance became impossible to ignore. Of the CDOs that started with AAA ratings in January 2002, 16 percent had lost that top grade by November 2004. Almost 14 percent of second-tier (AA-rated) securities were cut, and nearly 17 percent of CDOs with third-tier (A- rated) grades were cut. Those early CDOs, which typically contained vanilla corporate bonds, were hurt by a swift deterioration in average creditworthiness, combined with some hefty one-off defaults, including those of Enron Corp. and WorldCom Inc. Demand Soars Memories, though, proved short, and demand for CDOs soared as credit-rating cuts on corporate debt became rarer. (The economy was growing, and most companies had enough cash to cover their debts.) In 2004 in Europe alone, Moody’s rated $56 billion in European collateralized debt backed by default swaps. That was a 20 percent gain over the previous year, according to figures provided by the company at the start of 2005. By 2006, the derivatives printing presses were stamping out $503 billion of collateralized debt for the rating companies to grade, up from $274 billion in the previous year and $144 billion in 2004. In April 2007, Moody’s announced a fourth-quarter profit increase of 20 percent, as revenue from rating structured- finance transactions leaped to $251.5 million, a 44 percent gain over the same period in 2006. Almost half of Moody’s total 2007 sales of $583 million came from its structured-notes business, dwarfing the $115 million it made by analyzing company creditworthiness. Fatally Flawed Risk appetites increased, and CDOs became even more exotic and complicated. Structured-product specialists worked to broaden their appeal by tying CDO values to a broader range of underlying markets, some even creating theoretical bets that were tied to abstract prices. To grade these new financial instruments, rating companies used methodology that was fatally flawed from the start. It was based on induction, the process of inferring a general law or principle from the observation of particular instances. But the particular instances the rating companies chose did not incorporate the lessons of previous housing booms, nor the nonexistent histories of some new, theoretical bets. Instead, rating companies used the brief price history of the derivatives market as a benchmark to assess its likely future price performance. Indigestion The most egregious example of derivative market excess came with the invention of the constant-proportion debt obligation, known as a CPDO. In June 2006, Dutch bank ABN Amro Holding NV issued a 38-page marketing brochure describing a security called Surf: “the first CPDO; a breakthrough in credit investments.” CPDOs were the credit derivatives market’s hottest alchemical method for transforming plumbous yield premiums into the gold of market-beating returns. The marketing literature and associated research reports suggested that the newfangled securities were the holy grail of investing — heads, you win; tails, you don’t lose. CPDOs were an abstract bet on the likelihood of defaults in the corporate bond market. With their values tied to credit- default-swap indexes, the securities promised to deliver as much as 2 percentage points more than money market rates during their 10-year life spans. That was worth about 5.6 percent at the three-month money market rates that prevailed when CPDOs began attracting attention in November 2006. Alphabet Soup At the time, German government debt, deemed the safest fixed-income investments in the European markets, yielded just 3.7 percent annually. No wonder CPDOs looked irresistible. Those remarkable rates of return were made possible by the magic of derivatives, which leveraged the initial bet by a multiplier of 15. The leverage turned average punters into high rollers with the potential for fantastic gains — and losses. When times were good and a CPDO looked set to meet its payment obligations, sponsoring investment banks could reduce their market bets. When times got tougher, banks increased those wagers to boost the security’s net asset value. Credit-rating companies issued CPDOs top ratings for both interest and principal payments. The alphabet soup cooked up by the derivatives chefs — boil some CDOs, toss in a dash of ABSs and a soupcon of CDSs, season with CPDOs and serve with a garnish of overly optimistic ratings — was sufficiently toxic to poison the entire financial system. Just Deserts Capitalism itself ended up looking sickly and anemic. Belatedly, investors discovered the truth of one of billionaire investor Warren Buffett’s aphorisms: Unraveling a derivatives trade, the so-called Oracle of Omaha had said, was like trying to carry “a cat home by its tail.” Wall Street had invented a machine that could recycle just about anything that generated a cash flow. It had a growing, reliable source of supply from the housing market, sufficient to keep the merry-go-round spinning. And shifts in both the investment banking culture and the investing landscape created a willing coalition of buyers and sellers. To contact the writer: Mark Gilbert in London at magilbert@bloomberg.net

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Wells Fargo Hedges Misbehave at Just Right Time: Jonathan Weil

January 28, 2010

Commentary by Jonathan Weil Jan. 28 (Bloomberg) — A strange thing happened last quarter at Wells Fargo & Co. A bunch of derivatives that were supposed to act as hedges on other assets seemed to go berserk. The good news for Wells shareholders is that the oddly behaving derivatives boosted the bank’s fourth-quarter earnings. There’s more to the story, though. The windfall might be a sign that Wells executives aren’t so great at judging some of the company’s risks, meaning there may be more risk than they think. The combined gains on the derivatives — which Wells calls “economic hedges” — and the assets they purportedly were hedging accounted for almost half of Wells’s $4 billion of pretax profit last quarter. That’s a lot of low-quality earnings. About $1.1 billion came from writing up the value of mortgage-servicing rights through changes to inputs in the mathematical models Wells uses to estimate their worth. Another $830 million came from gains on the derivatives that supposedly were hedging this portion of the servicing rights’ value. That’s right: The hedges and hedged items both went up. This scenario should have been as likely as both sides of a see- saw rising at the same time. Nothing quite like this had happened before at Wells, at least not to this magnitude. Indeed, while Wells may refer to the derivatives as hedges, they don’t qualify for hedge accounting under the Financial Accounting Standards Board’s rules, which is why Wells has to use the weasel word “economic” in the label. Airy Assets Mortgage-servicing rights are intangible assets that consist of rights to receive fees from third parties in exchange for doing things like collecting and forwarding monthly payments from homeowners. Unlike other intangibles, such as goodwill or trademarks, companies have the option under the accounting rules of marking them at their fair market values on a quarterly basis, and then running the changes in value through their earnings. Wells’s latest balance sheet showed $16 billion of mortgage-servicing rights that the company was carrying at fair value as of Dec. 31. The tricky part is that such assets are notoriously difficult to value. In accounting parlance, the gains on the mortgage-servicing rights were of the Level 3 variety. In layman’s terms, that means they can be pretty much whatever management wants them to be. Under the FASB’s rules , Level 1 means the value for a given asset comes from quoted prices in actively traded markets, known as mark-to-market. Level 2, or mark-to-model, means the value is measured using “observable inputs,” such as recent transaction prices for similar items where market quotes aren’t available. Make Believe Then there’s Level 3. This means a company measures the fair value of an asset using one or more “unobservable inputs,” or, as I call it, mark-to-make-believe. Companies can’t actually see the changes in value. Yet they get to book them through earnings anyway, based on management’s own subjective assumptions. The last time I took a close look at this subject for a column on Wells was in August 2007, after the company reported quarterly earnings that got a huge boost from Level 3 gains on its servicing rights. Back then Wells had reported a $2 billion gain, or more than half its pretax profits, from changes to inputs in its servicing rights’ valuation models. However, the company said I would be wrong to make comparisons between the size of its Level 3 gains and its overall profits. Up and Down Its argument: Doing so would ignore the effect that rising interest rates at the time had on the values of both the servicing rights (which went up) and the corresponding derivatives Wells said it was using as economic hedges (which went down). The derivatives, which generally fall into the Level 1 and Level 2 camps, had declined by about $2.2 billion. I wrote the column anyway, expressing skepticism that these derivatives were hedges in any real sense. It turns out I probably wasn’t skeptical enough. Wells’s spin on the latest results is that its hedges worked. On the company’s Jan. 20 earnings call, Wells’s chief financial officer, Howard Atkins , explained the gains by saying “hedging results in the mortgage business were strong” and “could remain relatively high as long as short-term rates remain low and the hedge performs effectively.” He added that Wells manages its mortgage business “very holistically” and that “actual hedge results in any quarter of course will reflect how much of the servicing asset we hedge and the effectiveness of the particular instruments we use to hedge.” Not Telling Similarly, in its earnings release, Wells said the $1.9 billion of gains largely reflected “the continuation of strong carry income and effective hedge performance.” What’s carry income? Actually, it doesn’t really matter, because Wells declined to disclose how much it was. And “effective” hedge performance? Give me a break. Remember, the gains on the derivatives were almost as large as the gains on the items they were supposed to be hedging. For all we know, there could come a time when Wells’s derivatives misbehave at the same time the market values of the mortgage-servicing rights plunge. That would mean a double hit to earnings, rather than a windfall. Oh, but what are the odds of that happening, since Wells seems to have it all figured out? Meantime, one step in the right direction would be for Wells to stop calling these things hedges, economic or otherwise. This bank’s derivatives seem to have a mind of their own. ( Jonathan Weil is a Bloomberg News columnist. The opinions expressed are his own.) Click on “Send Comment” in the sidebar display to send a letter to the editor. To contact the writer of this column: Jonathan Weil in New York at

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CFTC’s Gensler Says U.S. Should `Explicitly’ Regulate Derivatives Dealers

January 6, 2010

By Asjylyn Loder and Matt Leising Jan. 6 (Bloomberg) — The U.S. should “explicitly” regulate derivatives dealers, said Gary Gensler , who has pushed Congress to impose new rules on the $300 trillion over-the- counter derivatives market. Gensler, chairman of the Commodity Futures Trading Commission, has pushed Congress to give the commission greater authority to regulate over-the-counter contracts, a move that may give it more control of commodity speculation that takes place outside of regulated exchanges. “Leading up the financial crisis, it was assumed that the banks that deal in derivatives were already regulated, and thus did not need to be explicitly regulated for their derivatives transactions,” he said in a speech to the Council on Foreign Relations in New York. This was a “flawed assumption,” he said. He outlined a three-prong approach: regulate derivatives dealers, bring transparency to the OTC market, and move standard derivatives to regulated clearinghouses. He cited estimates that half of all commodity and energy derivatives transactions could be standardized. Clearinghouses, which are capitalized by their members, increase stability in over-the-counter derivatives markets because they lessen the effect of a default by sharing that risk among the membership and use daily margining procedures to keep accounts current. They also allow regulators to see market positions and prices. Congressional Action Congress has proposed new rules on derivatives as part of an overhaul of the financial system after the worst recession since the Great Depression led federal government to spend, lend or commit as much as $12.8 trillion to shore up the U.S. economy. Gensler is seeking additional authority from Congress to curb speculation in off-exchange commodity contracts so that traders can’t use OTC transactions to sidestep limits meant to keep one trader from gaining too much control of the market. House legislation passed in December requires that standardized contracts be processed by clearinghouses and executed on regulated exchanges or swap execution systems. Clearinghouses impose capital and margin requirements for trading. Commodity-based businesses such as manufacturers, airlines and energy producers that use derivatives would be exempt from the clearinghouse requirement if they can show they are using the contracts to hedge operational risk. The transactions would have to be reported to regulators. To contact the reporters on this story: Asjylyn Loder in New York aloder@bloomberg.net ; Matthew Leising in New York at mleising@bloomberg.net .

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Lehman Judge Approves $50 Million in Bonuses for Its Derivatives Employees

December 16, 2009

By Linda Sandler Dec. 16 (Bloomberg) — Lehman Brothers Holdings Inc. ’s plan to pay $50 million in bonuses to employees handling derivatives contracts was approved by a bankruptcy court judge, who said the payments provide essential incentives. Lehman, which is liquidating in bankruptcy, asked Bankruptcy Judge James Peck last month for permission to pay incentives to about 230 full-time employees unwinding the contracts. Lehman told Peck in a Nov. 25 filing that the derivatives team had brought in more than $8 billion in cash and settled 17 percent of the contracts. A bonus pool “designed to motivate and reward employees” in the group will help to maximize the value of the remaining contracts, it said. Diana Adams , the U.S. Trustee who oversees Lehman’s bankruptcy, said in a filing on Dec. 11 that she was questioning why Lehman needs to pay bonuses to people for merely doing their job, particularly vice presidents who have “limited authority” except for signing papers. Lehman filed the biggest U.S. bankruptcy in September 2008 with assets of $639 billion. The case is In re Lehman Brothers Holdings Inc., 08-13555, U.S. Bankruptcy Court, Southern District of New York (Manhattan). To contact the reporter on this story: Linda Sandler in New York at lsandler@bloomberg.net .

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Credit-Default Swap Traders Form Panel on Japan Debt as Aiful Roils Market

December 10, 2009

By Shannon Harrington Dec. 11 (Bloomberg) — The industry group that sets standards in the credit-default swaps market is forming a panel of lawyers and market participants to consider whether a private corporate debt restructuring process in Japan should trigger payouts to buyers of the debt-protection contracts. The International Swaps and Derivatives Association will form the panel after a meeting in Tokyo yesterday of about 150 traders, lawyers and investors to discuss whether the alternative dispute resolution process is a so-called credit event, New York- based ISDA said in a statement. The panel being created may make recommendations to ISDA’s determinations committee in Japan, a body of 15 dealers and investors that decides when payouts on credit swaps should be made. ISDA’s review was prompted by a dispute surrounding credit swaps on Aiful Corp. After the Kyoto-based consumer lender entered alternative dispute resolution talks in September, the determinations committee rejected three attempts to get payouts from contracts on the company’s debt even as one bank said Aiful ceased making loan payments. Credit-default swaps, which are used to speculate on creditworthiness or to hedge against losses on corporate bonds and loans, let buyers demand payment from sellers if the underlying company fails to make scheduled interest or principal payments, according to standard definitions published by New York-based ISDA. Banks, hedge funds, insurance companies and other investors use them to insure against default and to speculate on the creditworthiness of companies and countries. Parallel Mediation Japan’s outstanding swap contracts jumped to $887.3 billion as of June 30 from $554.2 billion a year earlier, according to Bank of Japan data . If traders determine that Aiful triggered payouts on credit swaps protecting debt holders, it would lead to Japan’s first auction to settle the derivatives. The ISDA panel will review the issue as the Japanese Association of Turnaround Professionals, which is mediating ADR talks with Aiful and Japan Airlines Corp ., said last month that it was forming a group of bankers, lawyers and government officials to review whether the ADR process should trigger credit swap payouts. ISDA will consider the group’s findings, though the ultimate resolution will be made by the determinations committee in Japan, ISDA general counsel David Geen said in an interview last week. To contact the reporter on this story: Shannon D. Harrington in New York at sharrington6@bloomberg.net ;

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China Blames `Fraudulent Practices’ of Foreign Banks for Derivatives Loss

December 3, 2009

By Bloomberg News Dec. 4 (Bloomberg) — China said “fraudulent practices” by some foreign investment banks were partly to blame for more than 11.4 billion yuan ($1.67 billion) of derivatives losses at Chinese state-owned companies last year. “Some international investment banks were the culprits behind the derivatives Waterloo suffered by Chinese companies,” Li Wei , vice chairman of the State-owned Assets Supervision and Administration Commission wrote in an article in the Study Times, a newspaper published by the Party School of the Central Committee of China’s Communist Party. The state assets commission oversees companies owned by the central government. Sixty-eight companies including China Eastern Air Holding Co. and China National Aviation Holding Co. lost money on derivative products sold by banks including Goldman Sachs Group Inc. , Morgan Stanley , Merrill Lynch & Co. and Citigroup Inc., Li wrote in the Nov. 30 article. He didn’t say which banks may have used fraudulent practices. Spokespeople at Goldman, Morgan Stanley, Merrill Lynch and Citigroup either declined to comment or weren’t immediately available. State-owned companies bought contracts linked to the price of oil and interest-rate swap products, Li wrote. The losses of 11.4 billion yuan were as of October last year, he added. The companies’ pursuit of large profits, the complexity of the derivatives contracts, poor corporate governance and risk management at the companies and a lack of sufficiently trained staff helped aggravate losses, Li wrote. State-operated enterprises should use derivatives to hedge against losses, lock in future profit and minimize risks, Li said in the newspaper. Companies should be careful not to use derivatives to speculate, he wrote. To contact the reporter on this story: Jiang Jianguo in Shanghai at jjiang@bloomberg.net Linda Shen in New York at lshen21@bloomberg.net

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China Blames `Fraudulent Practices’ of Foreign Banks for Derivatives Loss

December 3, 2009

By Bloomberg News Dec. 4 (Bloomberg) — China said “fraudulent practices” by some foreign investment banks were partly to blame for more than 11.4 billion yuan ($1.67 billion) of derivatives losses at Chinese state-owned companies last year. “Some international investment banks were the culprits behind the derivatives Waterloo suffered by Chinese companies,” Li Wei , vice chairman of the State-owned Assets Supervision and Administration Commission wrote in an article in the Study Times, a newspaper published by the Party School of the Central Committee of China’s Communist Party. The state assets commission oversees companies owned by the central government. Sixty-eight companies including China Eastern Air Holding Co. and China National Aviation Holding Co. lost money on derivative products sold by banks including Goldman Sachs Group Inc. , Morgan Stanley , Merrill Lynch & Co. and Citigroup Inc., Li wrote in the Nov. 30 article. He didn’t say which banks may have used fraudulent practices. Spokespeople at Goldman, Morgan Stanley, Merrill Lynch and Citigroup either declined to comment or weren’t immediately available. State-owned companies bought contracts linked to the price of oil and interest-rate swap products, Li wrote. The losses of 11.4 billion yuan were as of October last year, he added. The companies’ pursuit of large profits, the complexity of the derivatives contracts, poor corporate governance and risk management at the companies and a lack of sufficiently trained staff helped aggravate losses, Li wrote. State-operated enterprises should use derivatives to hedge against losses, lock in future profit and minimize risks, Li said in the newspaper. Companies should be careful not to use derivatives to speculate, he wrote. To contact the reporter on this story: Jiang Jianguo in Shanghai at jjiang@bloomberg.net Linda Shen in New York at lshen21@bloomberg.net

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Aiful’s Debt Impasse Triggers ISDA Review of Japan Credit Default Swaps

December 2, 2009

By Shannon D. Harrington Dec. 3 (Bloomberg) — Disputes over credit-default swaps protecting investors in Aiful Corp.’s debt have spurred the association that sets global standards for the derivatives to review definitions governing the contracts. The International Swaps and Derivatives Association is assessing whether Japan’s alternative dispute resolution process for companies restructuring their debt triggers a so-called credit event that would lead to payouts on swaps, according to Executive Vice-Chairman Robert Pickel . “Situations arise where the terms of our contract need to be considered in light of a particular legal situation in a particular jurisdiction,” Pickel said in a telephone interview from New York yesterday. “We’ll certainly look at the ADR situation in this way.” After Aiful entered ADR talks in September, a committee of 15 dealers and investors that determines when the swaps are triggered rejected three attempts to get payouts from contracts on the Kyoto-based lender even as one bank said Aiful ceased making loan payments. Failure to reach prompt agreement may damage confidence in Japan’s market for the securities, J. Paul Forrester , a partner and co-head of the derivatives and structured products practice at Chicago-based law firm Mayer Brown LLP, said in an interview last month. Japan’s outstanding swap contracts jumped to $887.3 billion as of June 30 from $554.2 billion a year earlier, according to Bank of Japan data. Declaration of an Aiful credit event would lead to Japan’s first auction to settle the swaps, said Hisayoshi Nogawa , a strategist at BNP Paribas Securities Japan. Default Insurance Credit-default swaps let buyers of the contracts demand payment from the seller if the underlying company fails to make scheduled interest or principal payments, according to standard definitions published by the ISDA. Banks, hedge funds, insurance companies and other investors use them to insure against default and to speculate on the creditworthiness of companies and countries. The Japanese Association of Turnaround Professionals, which is mediating ADR talks with Aiful and Japan Airlines Corp ., said last month that it was forming a group of bankers, lawyers and government officials to study whether the companies’ debt restructuring negotiations should trigger credit swap payouts. The group’s findings “will inform” ISDA’s review “but is not binding,” Pickel said in the interview. Contracts protecting a net $1.32 billion of Aiful’s debt were outstanding as of Nov. 27, according to New York-based Depository Trust & Clearing Corp. As much as $250 million more of Aiful’s debt is protected through credit swaps based on indexes in which the company is a member, Depository Trust data show. To contact the reporter on this story: Shannon D. Harrington in New York at sharrington6@bloomberg.net ;

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Thomson Default Swaps Have Been Triggered by Bankruptcy Event, ISDA Says

December 1, 2009

By Abigail Moses Dec. 1 (Bloomberg) — Credit-default swaps insuring about $887 million of Thomson SA debt have been triggered by a bankruptcy event and will be settled at auction, according to the International Swaps & Derivatives Association. The settlement will resolve all outstanding contracts on the owner of film processor Technicolor Inc. that weren’t paid out in auctions last month. More than $1 billion of Thomson swaps were then paid out as part of a restructuring event. Thomson filed for “sauvegarde” proceedings yesterday, granting it creditor protection through February 2010 while it carries out a debt restructuring. The Paris-based company will meet with its bankers on Dec. 21 and its bondholders on Dec. 22, before a shareholder meeting scheduled for Jan. 27. Contracts protecting a net $887 million of Thomson’s debt were outstanding as of Nov. 20, Depository Trust & Clearing Corp. data show. Credit-default swaps were conceived to protect bondholders against default and pay the buyer face value in exchange for the underlying securities or the cash equivalent. To contact the reporters on this story: Abigail Moses in London at Amoses5@bloomberg.net

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Geithner Says U.S. Economy Will Expand in Current Quarter, Into Next Year

November 19, 2009

By Rebecca Christie and Robert Schmidt Nov. 19 (Bloomberg) — Treasury Secretary Timothy Geithner said he expects U.S. economic growth will extend into next year and called on Congress to pass “as soon as possible” legislation intended to prevent another financial crisis. “We expect continued growth in the fourth quarter and ahead in 2010,” Geithner said in prepared testimony today to the Joint Economic Committee. Geithner urged Congress to pass a financial regulation overhaul intended to strengthen the banking system and guard against “market-driven excess,” to avoid a repeat of the worst crisis since the Great Depression. Congress is considering a plan that includes changes to oversight of large banks , consumer protection and derivatives. “We should never again face a situation — so devastating in the case of AIG — where a virtually unregulated major player in the derivatives market can impose risks on the entire system,” Geithner said, referring to American International Group Inc., the insurance company whose near collapse prompted government intervention to protect the rest of the financial system. The U.S. economy is projected to grow 3 percent at an annual rate in the final three months of 2009, the latest Bloomberg News survey of economists showed, after expanding at a 3.5 percent pace in the third quarter. To contact the reporters on this story: Rebecca Christie in Washington at Rchristie4@bloomberg.net ; Robert Schmidt in Washington at rschmidt5@bloomberg.net .

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Banks Hire Derivatives Expert To Fight Financial Reform

November 6, 2009

Several major banks are fending off legislation meant to regulate the lucrative derivatives market by hiring a high-powered financial lobbyist. The Hill reports that Edward Rosen, a partner at the Cleary Gottlieb firm, has played a key role in derivatives legislation as Congress hones in on regulating the multi-billion-dollar market. Cleary Gottlieb reported close to $1 million this year lobbying for work on the derivatives market, and according to third-quarter lobbying disclosure reports, Rosen has worked in recent months for financial behemoths like HSBC Securities, Wells Fargo, Deustche Bank, Citigroup and Bank of America Securities. A little more on Rosen from Cleary Gottlieb’s Web site: Mr. Rosen has served as counsel to the Securities Industry and Financial Markets Association, the Securities Industry Association, the Futures Industry Association, the International Swaps and Derivatives Association and The Bond Market Association. From The Hill : “This guy is considered the bee’s knees of knowing the inside-out of derivatives,” said a financial-services lobbyist. Rosen wrote a two-volume book on derivatives legislation and has spent years working on derivatives law and lobbying. A spokeswoman for Cleary Gottlieb declined to comment. The House could vote on derivatives legislation, which would give new powers to the Securities and Exchange Commission to regulate the market, as soon as the first week of December. The Huffington Post reported last month that trading in the unregulated $600 trillion market was partially to blame for spurring last year’s financial meltdown. More than 1,100 banks now trade in derivatives and four banks control the market: JPMorgan Chase, Goldman Sachs, Bank of America and Citibank, according to bank regulator the Office of the Comptroller of the Currency. The Hill reports that commercial banks in the US reported a record $9.2 billion in revenue on derivatives in the first quarter of the year and $5.8 billion in the second quarter, which are the most recent figures available on the market.

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Derivatives Bill Would Cost Government $872 Million to Implement, CBO Says

November 4, 2009

By Dawn Kopecki Nov. 4 (Bloomberg) — New laws for the derivatives industry would cost the U.S. government $872 million to implement as regulators increase oversight as part of expanded powers to police the market, the Congressional Budget Office said. Legislation to create stricter rules for derivatives that is making its way through Congress would cost the Securities and Exchange Commission $581 million for fiscal 2010-2014, and the Commodity Futures Trading Commission $291 million, the CBO said in an estimate dated yesterday. The CFTC would have to boost staffing 40 percent, or by 235 workers, while the SEC would need to expand by about 13 percent, or 450 employees, the CBO said. The legislation, which passed the House Financial Services Committee on Oct. 15, would also impose unfunded mandates on private companies. The cost to the industry can’t yet be determined because so much depends on how regulators interpret the new laws, the CBO said in a budget analysis dated yesterday. The nonpartisan CBO provides Congress with independent assessments on U.S. economic and budgetary decisions; it does not set budget policy. To contact the reporters on this story: Dawn Kopecki in Washington at dkopecki@bloomberg.com .

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Jill Schlesinger: Executive Compensation: The Best Halloween Costume

October 26, 2009

Dressing up executive compensation as the salvation of regulatory reform is the best Halloween costume of the year. Limiting executive compensation is a terrific way to appease the masses and make it look like you’re doing something without having to embark on the hard work of true regulatory reform. Of course it bugs us to watch Wall Street honchos going back to business as usual , but let’s not take our eyes off the ball here–there are lots of scary issues that need attention and I’m not sure compensation tops the list. Watch the PBS special ” Frontline:The Warning” to see why regulation of the derivatives market is imperative and trumps compensation by a long shot when it comes to needed reform. You’ll see how our heroine, Brooksley Born is shut down by the evil trio of Robert Rubin , Larry Summers and Alan Greenspan . Then there’s the ominous conclusion that nothing has changed to avert future disasters. “It’ll happen again if we don’t take the appropriate steps,” Born warns. “There will be significant financial downturns and disasters attributed to this regulatory gap over and over until we learn from experience.” In addition to derivatives, we need comprehensive reform that addresses interconnected institutions and part of that process must include establishing a mechanism to unwind large financial institutions. Despite former Citigroup CEO Sandy Weill ‘s advice not to get “caught up in a debate over ‘too big to fail’” (subscription required), a year after the fall of Lehman Brothers, there’s still no resolution authority in place to address large institutional failures. This week, we might see some progress–the House Financial Services Committee is going to discuss how to manage “too big to fail” organizations . (Sorry Sandy, some of us actually think that financial supermarkets like Citigroup need a better tool to weather a financial crisis than direct taxpayer assistance!) The model for resolution authority already exists: the FDIC has overseen 106 bank failures this year , without depositors losing a penny. As long as we have mega-banks and scatter-shot regulatory oversight , the real issues within the financial sector will continue to plague the system — and compensation limits won’t address those issues. Image by Flickr User amy b , CC 2.0

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Obama Says Wall Street Pay Curbs `Step Forward’ at Taxpayer-Funded Firms

October 22, 2009

By Julianna Goldman and Kate Andersen Brower Oct. 22 (Bloomberg) — President Barack Obama said limiting pay for top executives at firms that got the most government aid strikes a balance between the interests of taxpayers and restoring stability to the financial system. The president said the independent rulings by Kenneth Feinberg , Obama’s special master on executive compensation, are “an important step forward in curbing the influence of executive compensation on Wall Street while still allowing these companies to succeed and prosper.” “We don’t disparage wealth, we don’t begrudge anybody for doing well, we believe in success,” Obama said today at the White House. “But it does offend our values when executives of big financial firms, firms that are struggling, pay themselves huge bonuses even as they continue to rely on taxpayer assistance to stay afloat.” Feinberg is ordering pay cuts of an average of 50 percent and caps on benefits for top executives at seven companies that still owe the government billions of dollars from taxpayer- funded bailouts. The firms under Feinberg’s purview include New York-based Citigroup Inc. and Charlotte, North Carolina-based Bank of America Corp. The cash portion of salaries for the 25 highest-paid employees will be slashed an average of 90 percent while some cash will be replaced by shares that employees will be restricted from selling immediately. ‘Difficult Task’ Feinberg “was faced with the difficult task of striking the proper balance between standing up for taxpayers and returning a measure of stability to our financial system,” Obama said. Feinberg, 63, who was special master of the September 11th Victim Compensation Fund , was named to the Obama administration pay position in June following public outrage over reports in March that New York-based American International Group paid $165 million in bonuses to employees of the derivatives unit. The Federal Reserve also is proposing new guidelines on pay practices at banks and said it will launch a review of the 28 largest firms to ensure compensation packages don’t create incentives for the kinds of risky investments blamed for the financial crisis. While praising Feinberg’s plan, Obama said “more work needs to be done.” He reiterated his push for a regulatory overhaul as well as legislation that would give shareholders a greater say on executive compensation. In addition to compensation at Citigroup, Bank of America and AIG, Feinberg is overseeing pay at Auburn Hills, Michigan- based Chrysler Group LLC, Chrysler Financial Corp., Detroit- based General Motors Co . and GMAC Inc. To contact the reporters on this story: Julianna Goldman in Washington at jgoldman6@bloomberg.net ; Kate Andersen Brower in Washington at kandersen7@bloomberg.net

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`Abusive Swaps’ Would Be Banned Under Frank’s Plan for Derivatives Market

October 3, 2009

By Dawn Kopecki Oct. 3 (Bloomberg) — Legislation tightening oversight of the $592 trillion over-the-counter derivatives market would give regulators authority to ban so-called abusive swaps. The Securities and Exchange Commission and Commodity Futures Trading Commission would get the power to “prohibit transactions in any swap” that regulators determine “would be detrimental to the stability of a financial market or of participants in a financial market,” according to a 187-page draft measure released yesterday by House Financial Services Committee Chairman Barney Frank . Opaque financial products, including some derivatives, have contributed to almost $1.6 trillion in writedowns and losses at the world’s biggest banks, brokers and insurers since the start of 2007, according to data compiled by Bloomberg. Among fallen companies are Lehman Brothers Holdings Inc., the investment bank that filed for bankruptcy, and insurer American International Group Inc., which has been surviving on government loans. “Lacking and lagging regulation of OTC derivatives was a major contributing factor to last year’s crisis, including the highly leveraged credit-default swaps at AIG that prompted government intervention,” Representative Melissa Bean , an Illinois Democrat who serves on Frank’s committee, said in an e- mailed statement. The legislation offered by Frank, a Massachusetts Democrat, would require the most common and actively traded over-the- counter derivatives contracts to be bought and sold on exchanges or processed through a regulated trading platform. ‘Clear Window’ “We can’t effectively protect American consumers — and make sure they are paying fair prices for food, gas and other commodities — unless we have a clear window into the trading that affects commodity pricing,” Bart Chilton , a CFTC commissioner, said in a statement that described Frank’s proposal as helping “to move this discussion down the road.” The measure also would give the Treasury Department the final say if the SEC and CFTC couldn’t agree on joint regulations, including setting position limits or the treatment of products that are economically similar, such as stock options and stock futures. A three-page proposal released by Frank in July would have given that power to a new Financial Services Oversight Council. Derivatives are contracts used to hedge against changes in stocks, bonds, currencies, commodities, interest rates and weather. Credit-default swaps are derivatives that were created primarily to protect lenders and bondholders from company defaults. Some lawmakers and regulators have said they may have been used to spread false rumors about financial companies to drive down stock prices. ‘Naked’ Swaps Frank’s proposals stopped short of barring “naked” credit-default swaps, where the buyer doesn’t own the underlying asset being hedged. The lawmaker had said he was considering such a ban. The draft by Frank won praise from potential opponents in the New Democrat Coalition. The group, which includes Bean and describes itself as moderate and “pro-growth,” had offered competing legislation that would have given Treasury veto power over regulations enacted by the SEC and the CFTC. “Chairman Frank’s draft provides a solid start to discussions about reforming the derivatives market,” said Representative Michael McMahon , a New York Democrat who was lead sponsor of the competing measure. To contact the reporter on this story: Dawn Kopecki in Washington at dkopecki@bloomberg.com .

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