Treasury Secretary Timothy Geithner is close to a decision to exempt the $4 trillion-a-day foreign-currency market from key provisions of the Dodd-Frank Act requiring greater transparency in the trading of derivatives. In the horse-trading over the final conference version of that legislation last year, both Geithner and financial-industry executives lobbied extensively to give the Treasury secretary the right to create this loophole. As the practical reach of Dodd-Frank is defined by the executive branch, this will be the first major decision to signal whether regulators will act to strengthen or weaken the reforms.
Geithner has already made his own views clear. In testimony before the Senate Agricultural Committee in December 2009, he declared that the foreign-exchange market needed no special regulation. "The FX
markets are different," he said. "They are not really derivative in a sense, and they don't present the same sort of risk, and there is an elaborate framework in place already to limit settlement risk."
Geithner added, "These markets actually work quite well. We have a basic obligation to do no harm, to make sure that as we reform, we don't make things worse and our judgment is because of the protection that already exists in these foreign-exchange markets and because they are different from derivatives, have different risks and require different solutions, they require a different approach." This week, Treasury spokesperson Steve Adamske told me that Geithner stands by those views.
However, previously confidential information recently made public by the Federal Reserve Board reveals that in the aftermath of the collapse of Lehman Brothers in September 2008, the Fed pumped in $5.4 trillion over a three-month period to keep the foreign-currency market from collapsing. The Fed's peak injection of dollars on any one day occurred on Oct. 22, 2008, when it reached $823 billion, according to a Wall Street watchdog group's, Better Markets, analysis of the Fed data release.
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