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Napanee, Ontario | ... out of a two punch knockout combo.
The second punch came two days before the Christmas break for Congress on December 21, 2000, while many representatives were already off on Holidays..... just like another favorable piece of banker legislation that was passed 87 years earlier on December 23, 1913 (Federal Reserve Act). All coincidence I'm sure.
This second punch was the Commodity Futures Modernization Act. This legislation removed regulation from the CFTC in OTC derivatives markets. Brooksly Born, the CFTC chair, worked hard to prevent it from happening, but Larry Summers, Robert Rubin and Greenspan steamrolled her. The act essentially opened the gate for full on, legalized gambling. No collateral regulations required / enforced. All on good faith of counterparty 'market' enforcement. I.e. the market will sort itself out who to take bets with. Upon the passage of this act, the derivatives market exploded from 900 billion in the year 2000, to over 45 trillion in 2007. It now stands at over 500 trillion.
The value to the banks of these two "punches" to regulation was enormous. They could now use reserves from deposit & loan operations to fund full-on, un-regulated speculation in what is essentially a de-facto gambling market.
Dodd-Frank had one good provision in the bill - a partial resurrection of Glass-Stegal if you will -that made for separation of a banks' entities engaging in loan/deposit business, and derivative speculation. Ie, you couldn't use depositors reserves as a base to make wild plays in the derivatives market with. Well effective Dec. 12 2014, and through enormous pressure of the financial lobby and barely a whimper of resistance by conservative congress, this piece of legislation is now repealed.
I WONDER WHY. Maybe the banks know better than the rest of us exactly how much "collateral" they have set aside on these bets, and realize it is nowhere close, and are going to need any capital they can get their hands on if things start to turn.
Options are essentially the same form of security as a Credit default swap, or an interest rate swap, except the MAJOR difference is that the collateral positing for writing option positions is heavily regulated by the exchanges, broker / dealers, and the SEC, CFTC. None of this applies to OTC derivatives. Estimates of how under-collateralized the OTC derivative market is frightening. When things went sideways in 2007, We saw how much collateral AIG had posted... and they almost cooked the entire system when there was "only" 45 trillion in outstanding bets.
Now that number is 10x higher. You can probably appreciate the reason why bondholder's interests are paramount above anything, and central banks are doing whatever they can to avoid any haircuts and defaults that would trigger a cataclysmic daisy chain of collateral calls from counter-parties to CDS contracts on those bonds. The CDS market on Greek bonds for example, is nearly 10x the size of the greek bond market itself.
Edited by OldMcdonald 2/26/2015 19:03
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repeal of Glass-Steagall Caused the Financial Crisis
