Don't let banks weasel out of derivatives reform
June 8, 2011
By Robert A. Green Forbes blog version
JP Morgan Chase's Jamie Dimon and other bankers want to reverse Dodd Frank's new derivative rules. Dervatives are their crown jewel of profit and also ground zero of the meltdown. The hidden $600-trillion derivatives market dwarfs the exchanges. Dimon is also trying to block higher capital ratios.
You can't fix "too big to fail" unless you clear derivatives on exchanges to bring this risk and protection trading out of dark pools and clouds. When housing dropped more than expected during the financial crisis, counterparties like AIG couldn't settle their bets. Very little capital backs up those $600 trillion of bets — far less than normal capital requirements.
Derivative bucket shops were closed after the 1907 panic. At that time, they consisted of side betting parlors (much smaller than exchanges). Derivatives were freed to run havoc in 1999 in an inappropriate and sneaky way. This needs to be fixed as soon as possible; otherwise, bankers will continue to win, while the taxpayers will wind up bailing them out and losing.
Dimon is happy Dodd Frank stopped subprime and small business loans — the money there was in predatory loans, and who wants that anymore? Dimon is focused on keeping derivatives. He's very wrong about this decision. If bankers reverse Dodd Frank on derivatives, we will surely have another crisis and huge bailouts in a few years. This reminds me of all the Fannie defenders who saved them for a decade making the bubble much worse. Hang tough regulators, Congress and Bernanke.
Banks argue that derivative paper work is a mess and too hard to clean up for exchange clearing. What? All the more reason to force clean up and clearing.
Bank clients often use derivatives to cheat on their accounting, manage earnings, goose stock prices and bonuses, and cheat on their taxes. Goldman conceived and sold derivatives to Fannie to fool investors, fight off regulators and fuel bonuses to top management. Goldman used derivatives to help Greece fool the EU.
Derivatives are not just wild side bets for profit; they are the main tools for creating structured "rip-off" products worldwide. Take these weapons of mass destruction away from bankers. Dodd-Frank just addresses the tip of the iceberg.
It's time for accountants to do a better job uncovering these derivative schemes too. They need to focus more on derivatives and disclosure in financial statements.
Posted 2 years, 1 month ago on June 8, 2011
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