This is interesting. According to the article, with the Dodd-Frank regulation put through in 2010, it looks like the new rules now gives restrictions on U.S. banks that have access to the Federal Reserve discount window, in contrast, foreign banks that have U.S. branches do not get access to the discount window but “can” trade in derivatives.
This creates the issue on banking preference depending on your country of origin. I do agree that banks that take part in derivatives trading, should not have access to u.s backstops reserved for deposit taking commercial banks.
CNBC (Financial Times) – The U.S. Federal Reserve is weighing a plan that would allow big foreign banks to avoid costly regulatory changes that were meant to prevent derivatives trading from being subsidized by U.S. taxpayers.
$5 trillion is quite a bit of debt insurance to have exposure on. This could be of concern, both banks should clear up where a majority of this exposure originates before this rumor-mill gets out of control. I would assume that debt insurance is purchased in places where there was enough risk to bring that type of protection into the picture. I would think that the emerging portion of the Eurozone would be of higher risk. Banks need to set this straight soon, they already still haven’t fully disclosed and written down all they liabilities they still have from the U.S. real estate bubble of 2007.
Bloomberg (Christine Harper) – JPMorgan Chase & Co. (JPM) and Goldman Sachs Group Inc. (GS), among the world’s biggest traders of credit derivatives, disclosed to shareholders that they have sold protection on more than $5 trillion of debt globally. Just don’t ask them how much of that was issued by Greece, Italy, Ireland, Portugal and Spain, known as the GIIPS.
DAMN!?!?!??! The United States only has a $14 trillion dollar annual GDP. The world is around $100 trillion. Sure looks like all that financial reform and new rules did a bunch. All I seem to see from that is we have codified “Too Big Too Fail” so that we have to bail out these banks and they still are allowed these outrageous derivative positions. Welcome to America, the place where as long as you make a big enough mess, we will not only bail your out but we won’t even bother throwing you in jail.
For all the crap I have given Ben Bernanke on this site (I do hope this makes it to you), he did make one really good call today on C-Span and it gave me a little perspective into him as a person/chairmen/professor. The question came from a Senator in the hearing about what Mr. Bernanke did to investigate and pursue these alleged criminal issues that have arisen since the crisis made all this wrong-doing apparent. Mr. Bernanke responded in such an honest manner but it was a well needed slap in the face to our representatives. He turned around an said that this was not the purview of the Federal Reserve. AND HE IS CORRECT.
It is our responsibility as a society to punish these people but either because we are incompetent or our representatives are too lobbied, we did nothing. How can we have the largest financial crisis in the history of the world and really no one goes to jail??? Even after the S&L crisis, we had over 700 prosecutions. I am so sick of having to say this but we have to do something after every crisis and make sure to set the right precedence. Quit letting politicians tell you “we need to look forward and not into the past”. You know what I say to that? F*$k Y*@! (really)
USA Watch Dog (Greg Hunter) - I keep hammering away at the fact the Fed doled out $16 trillion in the wake of the credit crisis of 2008. This is an enormous sum that is greater than the all goods and services produced in the U.S. in a single year. Domestic banks and companies got the money, right along with foreign banks and companies. In effect, the Federal Reserve bailed out the world financial system. Now, we are right back to square one facing another financial meltdown with European banks and sovereign debt. If the Fed spent $16 trillion, why in the heck is this problem not fixed and why isn’t the world economy taking off like a rocket?” The simple answer is it wasn’t enough money.
After reading through this MSNBC article, I found it really interesting that the tension is really coming down to derivatives regulation. If you have not been following our conversations on derivatives then here is a little refresher. Derivatives, as the name implies are synthetic financial instruments that are created to either match performance of an instrument that it was derived from or provide some sort of performance if something happens to some underling asset.
They are basically contracts that have terms and they currently traded over the counter (OTC) in a unregulated fashion. This may seem harmless until you find out the over $600 trillion dollars of these contracts exist according to the Bank of International Settlements (BIS). In the light of them being unregulated, their are no capital requirements for holding loss reserves in case the financial institution that is holding this contract is on the wrong side of what ever bet they made. The famous case of this destructive effect was the failure of American Insurance Group (AIG) in their record $180 billion bailout by the U.S. government. They were issuing credit-default swaps which are basically corporate debt insurance on sub-prime loans.
As we saw, they went bad and because AIG did not carry adequate reserves against losses, when the market went down, so did AIG. They were an insurance company but our commercial banks are also in the market and they are suppose to be our safest financial institution and that is why we regulate them so heavily.
It is very mis-guided if the banks and lobbyists get their way and take out the derivative regulation from the bill. In effect we would be setting ourselves up for another crisis and it would be only a matter of time for the banks to get into some risky asset class and they have the market for them turn sour. Call your representatives and explain to them why it is important to regulate derivatives and stop letting banks keep them off the balance-sheet and in the shadows.
The biggest flash point for many Wall Street firms is the tough restrictions on the trading of derivatives imposed in the Senate bill approved Thursday night. Derivatives are securities whose value is based on the price of other assets like corn, soybeans or company stock.
The financial industry was confident that a provision that would force banks to spin off their derivatives businesses would be stripped out, but in the final rush to pass the bill, that did not happen.
The opposition comes not just from the financial industry. The chairman of the Federal Reserve and other senior banking regulators opposed the provision, and top Obama administration officials have said they would continue to push for it to be removed.
Is this the signal of what is to come from all the “reform” that we are suppose to see? Will all these new financial regulation reforms be watered down and have exemptions that allow the same systemic events? We did the bailout against popular opinion we created a form of “moral hazard” sending the signal that as long as you create a systemic risk to the financial system, you will be bailed out and this is the precedent we are left with for the future. Now when it comes down to closing loopholes in rules or putting regulation in place to prevent this from happening again, are we going to fail at this as well? Look at the two links below and you can read through the bill and guideline yourself.
Bloomberg, New York - Legislation proposed by U.S. Representative Barney Frank would weaken an Obama administration guideline requiring the most common private derivatives to be traded on exchanges or regulated systems.