At the same time that the economy was entering its darkest moments in decades last October, the nation’s biggest banks were holding daily phone conferences with each other. Wall Street executives were gearing up for a fight as the buzz calling for regulatory overhaul became louder in Washington.
Previously designed as a financial instrument that limits risk, the credit-default swap as well as other derivatives pushed the US economy on the edge of collapse. It is apparent that a major overhaul of financial regulations is required to prevent future disasters. Banking institutions don’t seem to want any type of regulation at all though they seem resigned to the fact that it will happen.
Now, the question enters – just how much regulation should be implemented? Nine of the largest players in the derivatives market such as Goldman Sachs Bank USA, Citigroup, JPMorgan Chase, and Bank of America® created a lobbying arm on November 13. The CDS Dealers Consortium will be overseen by Edward J. Rosen; the same individual who helped stop regulation in the derivatives market a decade before.
Wall Street vs. Legislators
Two opposing viewpoints need to be tackled as new legislations take shape. Individuals in favor of stricter regulations claim that this will help prevent disastrous derivatives losses similar to what happened to American International Group. The company has received over $170 billion in government support so far.
To this end, legislators who favor more oversight are pushing for an open exchange trading – similar to the stock market. This will enable the structure and value of each trade to be transparent. On the other front, banks claim that when regulations become too strict, innovation and growth in the financial market will be repressed. This camp wants certain financial products to be traded privately with less disclosure in clearinghouses.
What Does the Obama Administration Say?
Though the Obama administration concurs that regulatory oversight is needed, there are critics about the exact plan Timothy Geithner wants to implement. In certain aspects, the Treasury’s plan relies, in part, in using clearinghouses. Critics reveal that this plan has a big disadvantage since minimal disclosure is necessary for complicated credit-default swaps.
Banks don’t want transparency because it will mean a huge cut in profits. Investors will pay less once they become aware of what the current market price for financial products are. Edward Rosen, the lobbyist hired by the big banks, has also recommended that the largest players in the derivatives market should still be overseen by the Federal Reserve. Some critics revealed that the Fed is an overly-friendly institution to the banks.