Today I am posting an editorial piece by Ginger Szala of Futures Magazine. Futures Magazine has been a voice for the futures trading industry for more years than I can remember – and that’s quite a few. Ms. Szala has edited the magazine for, I believe, more than two decades. While I don’t always agree with her positions, they are always thoughtfully taken and have never failed to stand for the best interests of the industry. This month’s (January, 2011) piece is particularly timely. It can be found on line at http://futuresmag.com/Issues/2011/January-2011/Pages/More-of-the-same.aspx
You will note that Ms. Szala is rather skeptical of the wisdom of the Republican right wing’s wish to return Wall Street Banking to the virtually unregulated condition that caused the greatest collapse since 1931. You will recall that my view has been that Dodd-Frank is inadequate for the task at hand, and that Obama has made to-big-to-fail banks even bigger, the more fool he.
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With the November Republican landslide, which saw the GOP take control of the House, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 may lose its teeth. Many pols, especially the new head of the House Finance Committee, Spencer Bachus (R-Ala.), want to rescind many, if not all, of the hard-fought rules the previous Congress had worked out. Apparently these people had their heads in the sand during the financial crisis and seem to believe everything was fine the way it was prior to the fall of Lehman Brothers and the buckling of Merrill Lynch, Citicorp and Bear Sterns. These are the same people who are angry about the growing deficit, but voted to extend the Bush tax cuts. They’ve also ignored how TARP-like programs aided many of the biggest banks on Wall Street.
Before this mid-term election, I wasn’t disgusted with the political scene. I thought the Dodd-Frank bill was a good compromise to rein in some bad behavior and make more transparent the trading world that caused many of the disruptions to the markets two years ago. Apparently self preservation wasn’t doing enough to prevent unbridled greed. And by the United States bailing out some of our largest banks — and making a profit at it as well — it helped stabilize a system that had gone off the rails. The fact these same bankers saw to it that big bonuses still were distributed despite poor performance pretty much crystallized their cynical viewpoint of government, taxpayers and the market in general.
The market works with a delicate balance of free market principles and government and quasi-government rules and regulations. Does anyone truly believe — except Ron Paul and Ayn Rand — that the free market polices itself? And if it does, isn’t it more an after-the-fact policing, i.e., "after the barn burns we’ll make sure we don’t light matches around straw."
The Dodd-Frank Act, with all its flaws, still addresses key weaknesses in our financial system. Did the banks like the rules? Hell no, but they had already shown a reckless disregard for due diligence and policing their own, even when it meant destroying the firm. Just ask Richard Fuld, formerly of Lehman Brothers. He’s furious the government didn’t save his firm, but did save others. But the only complaint should be, why did the government save anyone? The answer of course is that it was a necessary evil, and as loud as those are who pooh-pooh saving the banks, the fact is, it was needed.
And the truth is, Dodd-Frank is needed. The New York Times ran a front page story this past Sunday called "A Secretive Banking Elite Rules Trading in Derivatives." Nothing shocking there, and though some points in the story might be questioned, the key was, and no doubt will cause controversy for time to come, the bad boy bankers are still in charge, still directing the rules and still making it so they control the markets.
So is Dodd-Frank a sham? Have OTC derivatives players already called their own shots so exchange clearing organizations will bow to their requests, leaving behind other firms that want to join the party? But wait, isn’t price discovery all about transparency?
Electronic trading has changed the trading world, and largely for the better. It’s lowered the bar to entry, expanded product choice, tightened bid/offer spreads and reduced, for the most part, the cost of doing business. Moving OTC products onto exchange clearing platforms can only strengthen that market, and our financial system as a whole. Yet it appears many banks don’t want that; I fear they could learn the lesson of Mr. Fuld too late, but we’ll be the ones punched in the face.