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David Callaway
April 22, 2010, 12:01 a.m. EDT · Recommend (8) · Post:
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By David Callaway, MarketWatch
SAN FRANCISCO (MarketWatch) - Meet Goldman Sachs, international airline. No baggage fees; volcano proof; business class only.
That's about how easy it would be for Goldman Sachs Group Inc. /quotes/comstock/13*!gs/quotes/nls/gs (GS 158.72, -0.21, -0.13%) to fly through the ash-cloud of loopholes an over-heated Congress is spitting up in its latest attempt to regulate the derivatives market. In its zeal to punish Wall Street for the financial crisis, Congress is now focused on the middle of the three most bearish ways to regulate banks.
The momma bear way, or too soft, is the Volcker rule, which would prohibit proprietary trading at big banks. This is a small part of bank profits and would do little to affect their businesses, or bank stocks. Congress and President Obama understand this, which is why they want more. The papa bear way, or too hard, is the nuclear option of a forced break-up of the six biggest banks, which devastates securities markets and the role of the U.S. as the world's financial center.
The baby bear way, apparently dubbed just right on Capitol Hill, is to require all the big banks to divest themselves of their hugely profitable derivatives desks, and for all future trading of financial derivatives to be on transparent financial exchanges, such as trading in oil or wheat or orange juice is today.
This is a reasonable idea that would shed light on the murky world of over-the-counter structured finance products, such as the now infamous collateralized debt obligations, or CDOs. It might even prevent the so-called financial engineering that got Wall Street into its over-leveraged position to begin with. But as with any legislation in Congress, before the ink is even dry, politicians are racing to protect their interests.
So the version making its way to the Senate floor Wednesday included a host of exemptions for non-bank companies who use derivatives to hedge against quick movements in prices for resources they need. These include airlines, manufacturers, other trading corporations, and pension funds - entities like Enron, for example, or the Orange County, Ca., retirement fund - two infamous financial wizards.
So firms like Goldman, Morgan Stanley /quotes/comstock/13*!ms/quotes/nls/ms (MS 31.79, +0.11, +0.35%) , or J.P. Morgan Chase Co. /quotes/comstock/13*!jpm/quotes/nls/jpm (JPM 44.68, -0.67, -1.48%) would be able to register as other entities - airlines, manufacturers, pension consultants -- and continue to trade derivatives to their hearts content.
Sounds silly, until you realize that's just what Goldman and a number of other banks did almost two decades ago to enable them to trade widely in commodities index futures. In 1981, Goldman got itself classified as a "hedger," such as a farmer or food producer, so it could trade commodities without fear of limits put on pure speculators.
Part of the fallout from that was the disastrous run-up in food and commodities prices we saw in 2009, caused by speculators, which finally forced the Commodities Futures Trading Commission to take a look at these special exemptions. See story on Goldman futures trading exemptions.
This is where the battle over the derivatives bill lies in the next several days, and where Wall Street will concentrate its efforts. The more exemptions granted; the larger the loopholes and trading opportunities. These are not stupid people, by the way.
Another provision would require the $60 trillion foreign exchange swaps industry to be overseen by the CFTC, which is the same regulator that earlier this week was considering whether traders could make markets in Hollywood movie futures, but neither of those ideas will fly - especially in foreign currency markets.
To make its derivatives regulation work, and have teeth, Congress and the Obama Administration must resist all exemptions on derivatives trading. They must instead focus on forging a global alliance in the G-20 this weekend in Washington to stand behind the creation of a transparent market in derivatives trading through clearing houses and exchanges.
Doing this would lead to cheaper trading for customers and make it easier for global regulators to supervise the creation of new products. Importantly, it would also allow the big banks to continue to participate in what is in fact a very lucrative and vital business for the global economy, not just to hedgers, but to those seeking loans to rebuild their companies, industries, or countries. Like it or not, banks are the primary lenders and they need to be allowed to do business.
Whether this in fact will happen in Washington, or whether Congress will once again descend into a chaos of partisan bickering and blind and reactionary rule making, is anybody's guess. Goldman is almost certainly betting on both outcomes.
David Callaway is editor-in-chief of MarketWatch.
David Callaway is editor-in-chief of MarketWatch, responsible for the global news coverage of 100 journalists in 12 bureaus in the U.S., Europe and Asia. A financial journalist for more than 20 years, Callaway has worked for Bloomberg News, the Boston Herald, and assorted television and cable stations as a reporter, columnist and commentator.
The company might not be raking in the profits in the United States, but that's not going to stop the food and beverage giant from making us better people.
4 min ago2:15 p.m. April 22, 2010
- YurRight | 1:45 a.m. Today1:45 a.m. April 22, 2010
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