KC
31st August 2009, 14:26
Wall Street Stealth Lobby Defends $35 Billion Derivatives Haul
Aug. 31 (Bloomberg) -- Wall Street is suiting up for a battle to protect one of its richest fiefdoms, the $592 trillion over-the-counter derivatives market that is facing the biggest overhaul since its creation 30 years ago.
Five U.S. commercial banks, including JPMorgan Chase & Co., Goldman Sachs Group Inc. and Bank of America Corp., are on track to earn more than $35 billion this year trading unregulated derivatives contracts. At stake is how much of that business they and other dealers will be able to keep.
“Business models of the larger dealers have such a paucity of opportunities for profit that they have to defend the last great frontier for double-digit, even triple-digit returns,” said Christopher Whalen, managing director of Torrance, California-based Institutional Risk Analytics, which analyzes banks for investors.
The Washington fight, conducted mostly behind closed doors, has been overshadowed by the noisy debate over health care. That’s fine with investment bankers, who for years quietly wielded their financial and lobbying clout on Capitol Hill to kill efforts to regulate derivatives. This time could be different. The reason: widespread public and Congressional anger over the role derivatives such as credit-default swaps played in the worst financial crisis since the Great Depression.
“Public sentiment isn’t very much in their favor,” said Richard Lindsey, a former director of market regulation at the U.S. Securities and Exchange Commission who worked at Bear Stearns Cos. from 1999 to 2006, referring to Wall Street firms. “In some places, they’re not going to have anybody who wants to listen to them.”
FULL STORY (http://www.bloomberg.com/apps/news?pid=20601109&sid=agFM_w6e2i00)
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I think the important part of this article is summed up here:
The Obama proposal made public that day is an effort to gain oversight and control of the market for derivatives traded over the counter. The so-called OTC market consists of privately negotiated contracts that enable companies or investors to hedge against or bet on swings in the value of bonds, interest rates, currencies, commodities or stocks. Unlike exchanges, the business is unregulated and prices aren’t public.
The five biggest derivatives dealers in the U.S. -- JPMorgan, Goldman Sachs, Bank of America, Morgan Stanley and Citigroup Inc. -- held 95 percent of the $291 trillion in notional derivatives value of the country’s 25 largest bank holding companies at the end of the first quarter, according to a report by the Office of the Comptroller of the Currency. More than 90 percent of those derivatives were traded over the counter, the OCC data show.
What we have here is a completely unregulated derivatives market controlled almost entirely by five large corporations with absolutely no financial backing of any kind and is almost a kind of "second order speculation," based upon the betting of the value of various securities. I don't think there's much to discuss here, but this really does show the absurdity of the current state of the economy, when people are investing on whether a certain security increases or decreases in value. Perhaps next they will start betting on the derivatives themselves?
The Obama Administration is going to offer up an attempt at regulating these markets through the Securities and Exchange Commission, but I doubt that they will offer up a comprehensive plan to reform the entire derivatives market and bring it under sufficient regulation as to prevent the massive economics swings within this market, which has a profound effect on the economy as a whole. Because of the fact that these "investments" are done over the counter, it will be incredibly difficult to regulate such practices, and will require enormous amounts of resources allocated to the SEC which it previously has not had in order to constantly monitor these practices. The only way I could really see it done is through regular auditing, and I don't think that is realistic at all.
Aug. 31 (Bloomberg) -- Wall Street is suiting up for a battle to protect one of its richest fiefdoms, the $592 trillion over-the-counter derivatives market that is facing the biggest overhaul since its creation 30 years ago.
Five U.S. commercial banks, including JPMorgan Chase & Co., Goldman Sachs Group Inc. and Bank of America Corp., are on track to earn more than $35 billion this year trading unregulated derivatives contracts. At stake is how much of that business they and other dealers will be able to keep.
“Business models of the larger dealers have such a paucity of opportunities for profit that they have to defend the last great frontier for double-digit, even triple-digit returns,” said Christopher Whalen, managing director of Torrance, California-based Institutional Risk Analytics, which analyzes banks for investors.
The Washington fight, conducted mostly behind closed doors, has been overshadowed by the noisy debate over health care. That’s fine with investment bankers, who for years quietly wielded their financial and lobbying clout on Capitol Hill to kill efforts to regulate derivatives. This time could be different. The reason: widespread public and Congressional anger over the role derivatives such as credit-default swaps played in the worst financial crisis since the Great Depression.
“Public sentiment isn’t very much in their favor,” said Richard Lindsey, a former director of market regulation at the U.S. Securities and Exchange Commission who worked at Bear Stearns Cos. from 1999 to 2006, referring to Wall Street firms. “In some places, they’re not going to have anybody who wants to listen to them.”
FULL STORY (http://www.bloomberg.com/apps/news?pid=20601109&sid=agFM_w6e2i00)
________________________________________
I think the important part of this article is summed up here:
The Obama proposal made public that day is an effort to gain oversight and control of the market for derivatives traded over the counter. The so-called OTC market consists of privately negotiated contracts that enable companies or investors to hedge against or bet on swings in the value of bonds, interest rates, currencies, commodities or stocks. Unlike exchanges, the business is unregulated and prices aren’t public.
The five biggest derivatives dealers in the U.S. -- JPMorgan, Goldman Sachs, Bank of America, Morgan Stanley and Citigroup Inc. -- held 95 percent of the $291 trillion in notional derivatives value of the country’s 25 largest bank holding companies at the end of the first quarter, according to a report by the Office of the Comptroller of the Currency. More than 90 percent of those derivatives were traded over the counter, the OCC data show.
What we have here is a completely unregulated derivatives market controlled almost entirely by five large corporations with absolutely no financial backing of any kind and is almost a kind of "second order speculation," based upon the betting of the value of various securities. I don't think there's much to discuss here, but this really does show the absurdity of the current state of the economy, when people are investing on whether a certain security increases or decreases in value. Perhaps next they will start betting on the derivatives themselves?
The Obama Administration is going to offer up an attempt at regulating these markets through the Securities and Exchange Commission, but I doubt that they will offer up a comprehensive plan to reform the entire derivatives market and bring it under sufficient regulation as to prevent the massive economics swings within this market, which has a profound effect on the economy as a whole. Because of the fact that these "investments" are done over the counter, it will be incredibly difficult to regulate such practices, and will require enormous amounts of resources allocated to the SEC which it previously has not had in order to constantly monitor these practices. The only way I could really see it done is through regular auditing, and I don't think that is realistic at all.