Sunday, May 24, 2009

Wall Street Looks for Treasury to Guarantee Derivatives Franchise

Wall Street's greed and leverage drove America's financial crisis. Firms fled to the safe harbor of commercial bank status. Bloomberg reported on their efforts to reshape the system in their favor. Over the counter derivatives trading reforms look to benefit Goldman Sachs, JP Morgan, Credit Suisse, and Barclays. The story stated:

The banks sent the Treasury a plan written in February titled “Outline of Potential OTC Derivatives Legislative Proposal,” saying the Federal Reserve should extend capital and margin requirements to companies and hedge funds that trade in the $592 trillion unregulated market, according to a document obtained by Bloomberg News and confirmed by the Treasury. Energy companies, corporations and hedge funds don’t face such requirements now, while banks do under central bank oversight.

“The banks appear to wish to maintain the intra-dealer market and raise barriers to new entrants to keep the OTC business as compartmentalized as possible and to protect their profitable market conditions,” said Brad Hintz, an analyst at Sanford C. Bernstein & Co. in New York. “The Street’s lobbyists appear to be asking for a ‘club’ structure in OTC trading.”

(The Geithner plan includes) “All OTC dealers and other firms who create large exposures to counterparties should be subject to a robust regime of prudential supervision and regulation,” the proposal said. These included “conservative capital requirements,” “reporting requirements,” and “initial margin requirements.”

The bank-written plan, dated Feb. 13, said the systemic regulator “shall promulgate rules” requiring “capital adequacy,” “regulatory and market transparency” and “counterparty collateral requirements.”

Tim Geithner's sketchy plan is remarkably similar to the bank suggestion. Will ex-Wall Streeters get the franchise and the systemic regulator they want?

The devil is in the details, which will be revealed, likely late Friday afternoon of a holiday weekend.