Geithner Pries Away $30 Trillion ForEx Derivative Market from Regulation - FDL

[WillyT]

Geithner Pries Away $30 Trillion ForEx Derivative Market from Regulation
By: David Dayen - FDL
Saturday April 30, 2011 7:53 am

<snip>

Zach Carter reports on a blow to efforts to regulate the runaway derivatives market. Just as most derivatives are set to be put onto clearinghouses, Treasury Secretary Timothy Geithner exempted a large group of derivatives, foreign currency swaps, from the regulations.

The Treasury Department plans to exempt foreign exchange derivatives from new Wall Street reform regulations, a Treasury official said Friday, dismissing concerns about a market that prompted $5.4 trillion of emergency support from the Federal Reserve in late 2008.

Assistant Secretary for Financial Markets Mary Miller told reporters on Friday that the foreign exchange market already functions effectively and would not benefit from new rules. Subjecting the market to new rules, she claimed, would introduce a new and unnecessary “process” into “a very well-functioning market.”

But a 2009 study by Naohiko Baba and Frank Packer of the Bank for International Settlements concluded that there were major “dislocations” in the foreign exchange market in the aftermath of the Lehman Brothers bankruptcy — problems that were only resolved after the Fed pumped money into foreign central banks in order to ensure that global banks had access to dollars.

“After the bankruptcy of Lehman Brothers, the turmoil in many markets became much more pronounced,” wrote Baba and Packer. “In FX and money markets, what had principally been a dollar liquidity problem for European financial institutions deepened into a phenomenon of global dollar shortage.”

Even beyond the foreign exchange market’s problems post-Lehman, which are well-documented, simple common sense would dictate that you don’t keep a $30 trillion segment of the market unregulated. When I wrote about this possibility in March, I said just that: “It’s obvious that whatever financial innovation exists in the shadows will be the one used most frequently to maximize risk. So it’s not the type of instrument but how well-regulated it is relative to others that matters.”

<snip>

Much More: http://news.firedoglake.com/2011/04/30/geithner-pries-away-30-trillion-forex-derivative-market-from-regulation/

Plus...

And my favorite comment, via the Zach Carter article, from former top CFTC official Michael Greenberger:

If the too-big-to-fail banks gave out academy awards, Geithner would be best supporting regulator year in and year out.

:banghead:

:kick:

[xchrom]

1. Recommend

[Autumn]

2. Well at least Obama put the right guy in place,

for Wall Street and the banks anyway. Such a nasty piece of work.

[AlabamaLibrul]

3. I'm going to don the flamesuit for this

but currency swaps are not the same as every other big scary "derivative".

Currency swaps were never a major issue, they're pretty well controlled on their own and they aren't really related to TBTF in any way. Would I prefer to see it included in the regulation, so that it is set and cannot be changed without some amount of OK (like another wave of deregulation by Congress)? Yes. But this isn't really "CALL CONGRESS RIGHT FUCKING NOW!!!" material.

It has many legitimate uses as a hedge for multinational corporations, and for forex-related debts (i.e. taking debt in a currency believed to devalue vs the reserve currency of the company)

Then there's notional vs cash value, and all these other things as far as the $30T number. But it's about #50 on the list of OMG banking products we have to get rid of.

[mike_c]

4. thanks for the informative response....

eom