A Finely Aged Regulation: Treasury Goes After Derivatives
Also in the news yesterday (underneath the photo-release reversal madness, which I think Glenn Greenwald has pretty much covered) was the Obama administration's proposal to press for regulation of Credit Derivatives [emphasis added]:
The administration asked Congress to move quickly on legislation that would allow federal oversight of many kinds of exotic instruments, including credit-default swaps, the insurance contracts that caused the near-collapse of the American International Group.
The proposal will probably force many types of derivatives into the open, reducing the role of the so-called shadow banking system that has arisen around them.
I know, not nearly as sexy as the legal intricacies of a fight against FOIA, but still important. (Believe me, I tried for at least five minutes to think of a way to attach Paris Hilton's picture to this, too, but I've got nothing). This is a dry topic, and if I didn't know Americans so well, I'd say the boring tedium of it all was one of the reasons no one took this up a couple of years ago when it might have actually made a difference. Oh, wait, it turns out I do know Americans that well. Anyway, now that the financial world is falling apart, suddenly everyone's concerned about the "shadow banking industry," so we might see some real change, since voluntary national alcoholism doesn't seem like a passable strategy to get through the days. Like Andrew Leonard says, it is a bit like "closing the barn door after the derivatives escaped," but there are still plenty of derivatives in the barn that could use some supervision.
It turns out, though, there was somebody pushing for this exact strategy five years ago. Wait, did you say five years ago? I did, self, I did. Who was this forward-thinker?
Waaait a second. Where's his Darth Vader mask?
In 2004, Tim Geithner gave a speech1 on "Hedge Funds and Their Implications for the Financial System," in which he discussed, briefly, the need for credit derivatives to be traded more openly, and with some system of regulation. Later that year, he convened the heads of the banks and got them to volunteer to update their tracking systems and get things onto a standardized computer system, instead of everyone running their own haphazard (think: sticky notes) show. But the actual regulation of derivatives never went any further than that, whether because Geithner lacked the power, the resources, the guts, the inclination, the kickback, the conspiracy, or the political savvy or support (please remember who was running Treasury back then) to see that it did.
So, unlike PPIP and TARP and TALF and WTF (yes I made that last one up), this is a plan that someone's thought about for more than a week or two. Consider this Revenge of the Government Servants. The plan for regulating derivatives is... well, I won't risk putting you to sleep, but it's been in the works for a while -- we heard shades of it mentioned during Geithner's earlier Congressional testimony -- and it would consist, essentially, in rolling back big slices of the Commodities Modernization Act of 2000, which was adopted under the Clinton administration and, oh yeah, as both Andrew Leonard and the New York Times point out, with the full approval of one Larry Summers.
"Stop trying to help, Larry! Seriously!"
Openness? What? Accountability? On Wall Street? Surely you jest.
Well, a little bit, I do, because one of the agencies likely to be charged with overisght responsibilities is the Securities and Exchange Commission. If you haven't read TPM's overview of the scathing GAO report on the SEC, well, that's ten minutes of appalled laughter and stomach-sinking dread that you really owe yourself. The SEC is pretty much a dead agency. Giving it new things to do will only help if the President and Congress are planning to staff it up -- and they'd better not be sending Summers over there. SEC restructuring or, honestly, replacement is the biggest missing piece in this plan.
But overall, this is good news. Yes, it comes too late, and yes, it's probably not a perfect plan, but it's complex with some pleasantly optimistic overtones and just a hint of bitter, bitter regulatory nuttyness. Vintage government-label work, here. I'll drink to it.
1 Should you ever have trouble sleeping, I really, truly recommend perusal of the New York Fed's speech archive. Skip the lively speeches by the other guys -- Dudley's "May You Live in Interesting Times" is just no match for the somnia-inducing Geithner tome, "The Economic Dynamics of Global Integ..." Wha? What? Oh, sorry, nodded off.