The White House picks a fight on derivatives
Timothy Geithner has an op-ed in today's Washington Post arguing that "as the Senate [financial regulation] bill moves to the floor, we must all fight loopholes that would weaken it." But the loopholes he's arguing against haven't actually been unveiled yet. So this op-ed applies the Bush Doctrine to legislative politics: Anticipate the threat and strike before it reveals itself. To paraphrase Condoleeza Rice, you don't want the smoking gun in the form of a bipartisan deal on a bad bill.
The concern is over the derivatives language that Blanche Lincoln and Saxby Chambliss are writing. Because of a Senate quirk -- yes, another one -- derivatives are under the control of the Agricultural Committee, which Lincoln and Chambliss run. So notice the industries Geithner bows towards in his op-ed:
Transparency will lower costs for users of derivatives, such as industrial or agriculture companies, allowing them to more effectively manage their risk. It will enable regulators to more effectively monitor risks of all significant derivatives players and financial institutions, and prevent fraud, manipulation and abuse. And by bringing standardized derivatives into central clearing houses and trading facilities, the Senate bill would reduce the risk that the derivatives market will again threaten the entire financial system.
Wall Street and the Republicans appear to have dropped their fight against the Consumer Financial Protection Agency because it doesn't much matter for Wall Street and it's bad politics for Republicans. Instead, Wall Street's main priority now is keeping the derivatives market from being moved out of the shadows and into the light. It's simply much, much, much more profitable for them to write these complicated contracts when their customers don't have access to a standard price.
But that's not the argument, of course. The idea is to get non-banks to lobby for a wide exemption from the derivatives regulation -- wide enough that financial players can sneak inside it as well. But this alliance between the banks and the other users is a bit of an odd one. That's why Geithner is arguing, correctly, that transparency will lower costs for users. Put simply, if Wall Street is making a ton of money off of these trades, then the people who are paying them are not getting a good deal.
For more on the fight over derivatives, see Damian Paletta's article in today's Wall Street Journal. But the more decisive pressures may come not from the White House or Wall Street, but from Arkansas, where Lincoln is running for reelection. On the one hand, she could sure use a massive supporting expenditure from the banks. On the other hand, her primary challenger is threatening to attack her as a servant of Wall Street if she does their bidding on this.
April 13, 2010; 7:53 AM ET
Categories: Financial Regulation
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