The Forth Horseman of the Looming Collapse -- Derivatives Unleashed (again)
Secretary Geithner has been a very busy White House policy operative. While he's giving away the store on corporate taxes, he fails to remind us that Treasury wants to exempt certain currency derivatives -- swaps and forwards -- from the recently enacted Dodd-Frank financial industry reforms. Recall that the collapse of the Wall Street derivatives scheme, subprime mortgage backed securities, was largely responsible for kicking off the current economic decline.
Derivatives are risky financial instruments largely outlawed until 2000. The 1999 repeal of the Glass Steagall Act barring banks from risky investments and enactment of the Commodity Futures Modernization Act of 2000 changed all that. These bipartisan legislative efforts became the enabling acts for the reckless ride to ruin thanks to Wall Street and the big banks
What are President Barack Obama and Secretary Geithner up to?
Gary Gensler, Commissioner of the Commodity Futures Trading Commission (CFTC) has a clear picture of the Obama -- Geithner scheme. Gensler sent a letter to the US Senate in August 2009 objecting to a proposal similar to the one Geithner just released. He said,
"Currency and interest rate swaps could be broken down into their component parts and then restructured to resemble a series of foreign exchange forwards or a foreign exchange swap to come within the scope of these foreign exchange exclusions and thereby avoid regulation." In other words, this proposal opens the door to wider currency speculation.
The exemption for foreign exchange currency swaps and forwards would enable Wall Street and the big banks to continue doing what they have done all along, engage in irresponsible and damaging currency speculation of the type that ruined the economy of Greece, for example.
Commissioner Gensler pointed out that, "these exclusions may have the unintended consequence of undermining the CFTC's enforcement authority over retail foreign currency fraud." The use of "unintended consequence" is a generous appraisal for a move by Treasury that makes fraud easier. We can better judge Geithner's motives as self-evident from the predicted outcome.
Back to the Future
Gensler made another critical point regarding Geithner's 2009 proposal for over the counter derivatives trading, language that made it into the Dodd-Frank financial reform package:
"The Proposed OTC Act provides for mandatory clearing and exchange trading of standardized swaps. It creates an exception, however, from the mandatory clearing and trading requirements when one of the counterparties is not a swap dealer or major swap participant (and does not meet the eligibility requirements of any clearinghouse that clears the swaps)" Gary Gensler, Commissioner CTFC, August 2009.
New York Times, December 10, 2010
The informed public is already suspicious of Wall Street's secrecy and market manipulation. The New York Times headline of December 10, 2010 shows the realty of the situation. This is happening under the Dodd-Frank financial reform legislation. What happens when Gensler's prediction of a separate, unregulated derivatives market operates without regulation as allowed by the financial reform? Another meltdown is in the works thanks to the legislation we were told would make sure that never happened again.
We live in an upside down world. The real threat to the United States is the ongoing economic decline, jobs that they tell us will never return, no new jobs and flat income since 2000, and financial schemes that make a tiny fraction even wealthier while the nation as a whole struggles and declines.
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