After the financial crisis of 2008 Congress passed legislation, known as the Dodd-Frank financial reform law of 2010, to bring more regulatory oversight to the complex and risky derivatives market, which many say contributed to the global economic meltdown.
Now here we are three years later, still struggling to recover from the Great Recession, and Congress is already undermining those regulatory efforts. The House passed legislation Wednesday that would exempt the trading of derivatives from federal oversight if it occurs outside the United States.
Derivatives are investments whose value is based on some other investment, such as oil and currencies. They are often used to protect an investor against future price fluctuations of an underlying commodity or security. But they also are used by financial firms to make speculative bets.
Supporters of the House bill say the exemption is necessary to allow U.S. firms to remain competitive in foreign markets, according to an Associated Press report. They say the bill would bring some certainty to the rules of derivatives markets, which would help companies that use derivatives to hedge against risks, and that, in turn, would help economic growth and jobs.
But Rep. Michael Capuano, D-N.Y., told the Huffington Post, "This bill is not about American jobs. This bill is all about foreign swaps. If they’re going to create jobs, they’re going to be in foreign countries."
Opponents also say the regulations outside the U.S. tend to be weaker and the exemption would put the broader financial system at risk. Some point to the $182 billion federal bailout of American International Group Inc. at the height of the financial crisis -- the largest for any company. AIG nearly collapsed because of its massive derivatives bets on the housing market. It has since repaid the bailout.
"We’ll be put in the position of bailing out failed institutions all over again," said Rep. Maxine Waters of California, the senior Democrat on the House Financial Services Committee, in debate before the vote. "We shouldn’t have to rely on foreign regulators to protect us."
Marcus Stanley, policy director of Americans for Financial Reform, agrees. In an opinion piece he wrote for US News and World Report, Stanley notes that no country in the world is as advanced as the U.S. in regulating its derivatives markets. He said permitting foreign regulation to govern U.S. derivatives transactions would create an incentive for global banks to transact their business through whatever jurisdiction has the weakest regulations - a "regulatory haven" to match the tax havens that international corporations already use.
"Almost every major financial scandal involving derivatives -- from the collapse of Long-Term Capital Management’s Cayman Island operations in the 1990s, to the bailout of AIG’s London-based trades in 2008, to JP Morgan’s recent ‘London Whale’ trading losses - has involved derivatives transactions conducted through a foreign entity," Stanley wrote. And, he continued, "Because derivatives markets are global and conducted electronically, a click on a computer keyboard is all it takes for a major bank to route any transaction through a non-U.S. subsidiary. But the risk can still return to impact the U.S. economy."
What concerns us about the legislation passed on Wednesday isn’t just that it was approved by the GOP-controlled House, but that it received bipartisan support, with 301 representatives voting in favor of creating this regulatory loop-hole.
The legislation’s prospects in the Senate are uncertain and the White House has signaled it would veto the legislation. Still, AP reports that just its passage by the House could pressure regulators to take a more lenient approach in writing rules for oversight of foreign derivatives trading.
At the same time that Congress is considering legislation to undermine the Dodd-Frank financial reforms, Stanley said both Wall Street and foreign regulators are pressing the Commodity Futures Trading Commission to step back from enforcing its rules overseas.
Finally, industry and some members of Congress are seeking to renegotiate U.S. financial regulations through secretive international trade negotiations, which Stanley said could allow numerous new international exemptions to be added without any public accountability or oversight.
"It’s crucial that these efforts do not succeed," Stanley concluded. "After years of work to implement basic safeguards in the massive shadow markets that crashed the global economy, we can’t let Wall Street sidestep these protections simply by taking its business overseas."
We agree. We have nothing against people making money on Wall Street, but not if it means passing all of the risks, and the cost of another bailout, to U.S. taxpayers. We’ve been down that road once already and we’re still paying the price.