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Key House committee passes legislation to regulate derivatives

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By Silla Brush, The Hill

A key House committee on Thursday passed legislation reining in the multitrillion-dollar market for financial derivatives.

The House Financial Services Committee passed the bill on a 43-26 vote, with only one Republican, Rep. Walter Jones (N.C.), siding with all Democrats.

The bill is the first in a series of measures the Obama administration and congressional allies are pushing to remake the financial system. House leaders are eyeing votes in November, while it may take more time for the Senate to consider legislation.

Rep. Barney Frank (D-Mass.), chairman of the Financial Services Committee, is now turning his attention to marking up legislation creating a new Consumer Financial Protection Agency (CFPA). Frank said he hoped to complete the markup of the measure by Wednesday. The CFPA legislation has been much more contentious.

Lawmakers are weighing changes to the bill to shore up support among concerned centrist Democrats. Republicans, the financial industry and parts of the business industry are strongly opposed to the new agency.

Democrats are looking to bolster support for the proposal by considering an amendment that, according to a draft, would leave most of the responsibilities for overseeing small banks and credit unions with the existing regulators. The amendment, sponsored by Reps. Dennis Moore (D-Kan.) and Brad Miller (D-N.C.), could siginificantly blunt opposition from the community bank and credit union lobbies, two powerful parts of the financial industry.Frank told reporters he supports the amendment and it is a "legitimate response" to concerns raised by community banks and credit unions.

"It's not campaign contributions that affects people. It's votes. Everyone has community banks in their districts and it's not just community banks. It's credit unions."

Frank ripped into some of the larger banks that lobbied hard against the agency proposal.

"Goldman Sachs, Bank of America, JPMorgan Chase & Co., Morgan Stanley have no influence," he said.

Democrats are also trying to balance the scope of powers under the agency between federal and state officials. The Obama administration and liberal Democrats are in favor of allowing state officials to pursue additional or stronger regulations than the federal standards. Centrist Democrats and the financial industry support allowing the agency to pre-empt state action.

The derivatives legislation is aimed at bringing transparency to a massive market that many blame for exacerbating the crisis last year and contributing to the downfall of American International Group (AIG).

The bill aims to move most trades in derivatives, financial tools used to hedge risk, on to a public exchange if they are between financial institutions. Frank included a broad exemption for companies, or "end-users", that are not dealers and that use derivatives to hedge risk for commercial purposes. The business and financial lobby and centrist New Democrats worked hard to include the exemption in the bill.

http://thehill.com/homenews/house/63227-de...house-committee

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Democrats are looking to bolster support for the proposal by considering an amendment that, according to a draft, would leave most of the responsibilities for overseeing small banks and credit unions with the existing regulators. The amendment, sponsored by Reps. Dennis Moore (D-Kan.) and Brad Miller (D-N.C.), could siginificantly blunt opposition from the community bank and credit union lobbies, two powerful parts of the financial industry. Frank told reporters he supports the amendment and it is a "legitimate response" to concerns raised by community banks and credit unions.

"It's not campaign contributions that affects people. It's votes. Everyone has community banks in their districts and it's not just community banks. It's credit unions."

So much for draining the swamp. :whistle:

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WILLIAM BLACK: Well, the earliest effort is—should be a real wake-up call, because it’s horrible. Barney Frank has proposed legislation on financial derivatives that essentially exempts what are called over-the-counter derivatives from most regulation, and it is over-the-counter derivatives that have been a major cause of this crisis. So that’s utterly insane. There’s no conceivable justification for it. And he stacked the hearing. There were nine witnesses; eight of them were from the industry and, of course, testified that they were vital to the world. The ninth witness was the only person who was in the least bit skeptical, and he was promptly gaveled down, unlike the others, by the chair. So it’s not only a farce; they’re willing to have us see that it’s a farce. They are so little afraid of public opinion and outrage that they’re not even taking steps to cover up the cover-up.

http://www.democracynow.org/2009/10/15/black

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I haven't read the legislation, so no strong views. The exemption is concerning, but I don't know how ominous it really is. It seems to be receiving cautious acceptance by the regulators. It still needs reconciliation with other bills.

Here's the Bloomberg writeup:

http://www.bloomberg.com/apps/news?pid=206...id=aHJppkG6rQDU

House Panel Approves Measure Regulating Derivatives

By Dawn Kopecki

Oct. 15 (Bloomberg) -- The House Financial Service Committee approved legislation today to rein in the $592 trillion derivatives industry, after reworking several provisions regulators had criticized as too lax.

The measure, approved 43-26, was welcomed by officials at the Treasury Department and the Commodity Futures Trading Commission. They said it still lacked some elements sought by President Barack Obama’s administration.

The administration called in August for imposing higher capital and margin requirements on derivatives markets and requiring that certain contracts be processed through clearinghouses. Regulators had said the original draft of the legislation sponsored by Representative Barney Frank, chairman of the Financial Services panel, left “gaps.”

“Our view is this is a tough, strong piece of legislation,” Assistant Treasury Secretary Michael Barr told reporters on a conference call today. “There are elements that we proposed that are not in the Frank bill. Those are the kinds of things that we think ought to be looked at going forward.”

CFTC Chairman Gary Gensler said in a statement that the bill was a “significant step” toward lowering risk and increasing transparency in the marketplace. “Substantive challenges remained,” he said. Mary Schapiro, chairman of the Securities and Exchange Commission, called approval “a very important step forward.”

Barr and Gensler, who didn’t specify the changes they want made, said they plan to work with Congress to reinstate some of the administration’s ideas. The measure approved today must be reconciled with similar bills pending in the House Agriculture and Senate Banking committees.

Broker Dealers

Frank’s panel today adopted an amendment, called “essential” by Barr, that would require broker dealers such as JPMorgan Chase & Co. and the Goldman Sachs Group, and their biggest customers, to trade and clear most derivatives contracts on regulated exchanges or swap-execution facilities.

It exempts from those requirements most “end-users,” companies that employ derivatives to hedge their operational risks, such as rising fuel costs, currency fluctuations or extreme weather.

Hedge funds and other large derivatives users that “expose counterparties to significant credit risk,” such as insurer American International Group Inc. and mortgage finance companies Fannie Mae and Freddie Mac, wouldn’t be eligible for the exemption.

Writedowns, Losses

Opaque financial products, including derivatives, have contributed to almost $1.6 trillion in writedowns and losses at the world’s biggest banks, brokers and insurers since the start of 2007, according to data compiled by Bloomberg. Toppled companies included Lehman Brothers Holdings Inc., the investment bank that filed for bankruptcy, and AIG, which is surviving on government loans.

Regulators had criticized an initial draft by Frank, a Massachusetts Democrat, at a hearing of the panel Oct. 7. That version “could unintentionally preserve existing regulatory gaps,” Henry T.C Hu, director of the Securities and Exchange Commission’s division of risk, strategy and financial innovation, said in testimony.

In response, Frank offered a new definition of “major swap participants” that would limit those eligible for exemptions from new regulations. The panel adopted that provision yesterday.

To contact the reporter on this story: Dawn Kopecki in Washington at dkopecki@bloomberg.com.

Last Updated: October 15, 2009 15:27 EDT

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An interesting guy:

April 3, 2009

William K. Black suspects that it was more than greed and incompetence that brought down the U.S. financial sector and plunged the economy in recession — it was fraud. And he would know. When it comes to financial shenanigans, William K. Black, the former senior regulator who cracked down on banks during the savings and loan crisis of the 1980s, has seen pretty much everything.

http://www.pbs.org/moyers/journal/04032009/profile.html

William K. Black, author of THE BEST WAY TO ROB A BANK IS TO OWN ONE, teaches economics and law at the University of Missouri — Kansas City (UMKC). He was the Executive Director of the Institute for Fraud Prevention from 2005-2007. He has taught previously at the LBJ School of Public Affairs at the University of Texas at Austin and at Santa Clara University, where he was also the distinguished scholar in residence for insurance law and a visiting scholar at the Markkula Center for Applied Ethics.

Black was litigation director of the Federal Home Loan Bank Board, deputy director of the FSLIC, SVP and general counsel of the Federal Home Loan Bank of San Francisco, and senior deputy chief counsel, Office of Thrift Supervision. He was deputy director of the National Commission on Financial Institution Reform, Recovery and Enforcement.

Black developed the concept of "control fraud" — frauds in which the CEO or head of state uses the entity as a "weapon." Control frauds cause greater financial losses than all other forms of property crime combined. He recently helped the World Bank develop anti-corruption initiatives and served as an expert for OFHEO in its enforcement action against Fannie Mae's former senior management.

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Black developed the concept of "control fraud" — frauds in which the CEO or head of state uses the entity as a "weapon."

No doubt. Consider, for example, Franklin Raines, former CEO of Fannie Mae. He's already settled out on civil charges filed against him, but if there's any justice, he'll still face criminal charges as well. Just an example. There are many more.

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