Senate moves toward combined bill on derivatives oversight

[TomCADem]

Source: Washington Post

Senate aides inched closer Friday to combining separate bills that would establish oversight of the vast market for derivatives, an effort central to the ongoing push to revamp the nation's financial regulations.

The Senate banking and agricultural committees, which share jurisdiction over parts of the derivatives market, recently passed different versions of legislation with a common goal -- bringing transparency and supervision to a market that has remained largely devoid of regulation.

Derivatives are private contracts that allow traders to bet on the direction of the prices of stocks, commodities and other assets. They also are used by companies to lock in prices for goods, such as oil, cotton or aluminum, which often fluctuate in value.

The market burgeoned in the years leading up to the financial crisis, with an estimated $600 trillion worth of deals. The result was huge profits for some Wall Street firms, but derivatives ultimately deepened the severity of the crash by amplifying risks across the system and tying the fate of companies like American International Group to firms across the globe.


Read more: http://www.washingtonpost.com/wp-dyn/content/article/2010/04/23/AR2010042304673.html?sid=ST2010042305257

---

Some Republicans, not McConnell, have claimed that they are not blocking reform, and that they agree on 90% of the bill. So, what's the problem? What is the 10 percent that Republicans are willing to filibuster over?

Derivatives. The bill approved this week by the Senate Agriculture Committee, chaired by Blanche Lincoln bans big banks from trading in derivatives. It also requires nearly all derivative contracts be traded on public exchanges and approved by a separate body called a clearinghouse. The result of these regulations would be to lower bank profits as such derivative contracts, which are supposed to reduce risk, become standardized. This should be a good thing. However, not for the Republicans who are taking their marching orders from Wall Street.

[msongs]

1. plus a transaction fee/tax on speculation trades to cover bailouts nt

[UpInArms]

2. Flashback: Greenspan objects to CFTC's stance on derivatives regulation.

http://www.netrootsmass.net/selise/financial-regulation-timeline/

nice compilation at the above link

here's a taste:

Regulation TIMELINE and notes:

June 7, 1987 – The NYT reports "Treasury now favors creation of huge banks".

Top officials at the Treasury Department have concluded that the Government should encourage creation of very large banks that could better compete with financial institutions in Japan and Europe.

The Treasury plan, which would permit the acquisition of banks by large industrial companies, was also endorsed by Alan Greenspan, in an interview before President Reagan nominated him this week to be chairman of the Federal Reserve Board.

Mr. Greenspan said the plan would provide multibillion-dollar pools of investment capital for a banking industry that was ‘’severely undercapitalized.” Mr. Greenspan has declined to be interviewed while he awaits confirmation by the Senate.

No formal policy or legislative agenda has been adopted by the Administration, but George D. Gould, Under Secretary of the Treasury, said in interviews that he favored creating 5 to 10 giant banks that would rival in size the largest banks in Japan, West Germany, Britain and France.

The Two Laws Involved

Formation of such large banks has been hampered by two of the nation’s principal banking laws: the Glass-Steagall Act of 1934, which separates underwriting and commercial banking, and the Bank Holding Company Act of 1956, which prohibits nonbanking companies from owning banks.

The only avenue left open to banks has been to merge among themselves. But state laws have historically prohibited interstate banking, and only recently have state legislatures begun to open their borders to out-of-state banks. These deals have usually involved a large out-of-state bank’s buying a smaller institution. Mergers, interstate or otherwise, among the giant banks could raise antitrust questions, and none of the few such deals attempted ever progressed very far.

In the Administration, the hope is that Congress can be persuaded to loosen the regulations. The banking industry, which has considerable political influence, is divided: The largest banks strongly support the changes while smaller banks fear they would be put out of business.

Thirty years ago the United States had 15 of the world’s largest banking institutions, but global dominance by American banks has slipped dramatically. Only two United States banking companies, Citicorp and BankAmerica, are now ranked in the world’s 25 largest. Japan has 14, including the world’s four largest banks. Two German, three British and four French banks complete the list.

”If we are going to be competitive in a globalized financial-services world, we are going to have to change our views on the size of American institutions,” Mr. Gould said. ”People are going to have to accept that some big American financial institutions will need more capital to be competitive.”

Mr. Gould acknowledged that any policy promoting the creation of very large financial institutions encounters deep-seated sentiments that date from the founding of the Republic. But he thinks the nomination of Mr. Greenspan could provide an important stimulus for change. Mr. Greenspan contends that many of the laws restricting commercial banks severely limit their ability to adapt to a changing marketplace.

Frequent Frustration For Deregulation Efforts

The Reagan Administration has met frustration in its efforts to lessen regulation of banking, largely because Paul A. Volcker, the current Federal Reserve chairman, has firmly opposed any move that would begin to break down the barriers that prohibit large nonbanking companies from owning banks. Mr. Volcker has also been rather grudging in his support of changes that would allow interstate banking and the underwriting of securities by banks.

[defendandprotect]

3. k