Ok, I Recant: Derivatives

Grrrrr…. Yesterday it looked like we were going to get something sane for the OTC Derivatives market.

Nope:

May 14 (Bloomberg) — U.S. regulators may impose the same price reporting and transparency requirements on over-the- counter derivatives that reduced bank profits by almost half in the corporate bond market when the Trace system was adopted seven years ago.

That ain’t enough.  It will drive spreads inward (which is bad for the scammer, I mean, banker profits) but it does nothing to guarantee nightly margining and therefore de-fang the "systemic risk" problem.

It also allows the lies to continue about counterparty solvency well beyond where functional insolvency happens, which is why we’re in this mess in the first place.

Treasury Secretary Timothy Geithner, Schapiro and Michael Dunn, the acting chairman of the Commodity Futures Trading Commission, called for increased oversight of over-the-counter derivatives to reduce risk to the financial system. Lax regulation contributed to the failures last year of Lehman Brothers Holdings Inc. and American International Group Inc., leading to the seizure of credit markets and causing more than $1.4 trillion in writedowns amid the worst financial crisis since the Great Depression.

The only way to stop this is as I have repeatedly said:

All such "products" must be traded against a central clearing exchange, much like with  listed options, so there is never a question about solvency because that central counterparty will not permit either agent on the "wings" of the trade to operate without posting margin on a nightly basis.

That is the only way that we will see the risk become one of losing money instead of "blowing up the world".

“Significant gaps in the basic framework of oversight over critical institutions” helped cause the financial crisis, Geithner told reporters. “A series of comprehensive reforms to create a stronger system, less vulnerable to crisis, with stronger protections for consumers and investors” will be hashed out with Congress, he said.

Those "significant gaps" were intentional acts and Geithner, despite the crooning yesterday, has proposed exactly nothing to get rid of them.  Indeed, he is up to his neck in the complicity that created these problems!

“ISDA welcomes the recognition of industry measures to safeguard smooth functioning of privately negotiated derivatives,” Robert Pickel, chief executive officer of ISDA, said in an e-mailed statement.

The fox doesn’t mind a fence around the chickens so long as you both leave a fox-sized hole and don’t post someone with a rifle near it.