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Once again the speculators who were behind the 2008 Oil spike crisis and the subsequent subprime mortgage meltdown got away. Once again the lawmakers were forced to negotiate on critical issues and had to leave the lockgates open that could bring about future market crashes. In fact some parts of the reforms bill could actually bring about enhanced action from the market players that would precipitate such market a collapse.
This was a rather dissapointing end to a two year excercise by Senate Banking Comittee and the House Financial Services Comittee to place curbs on potentially risky activities by Banks, similar to that witnessed during the 2008 subprime mortgage crisis.Negotiating a Banking reforms bill was always going to be tough especially when the purpose of it was cutting time between its passage through the House and the Senate.
The main arena of risk taking that caused the financial crisis of 2008 was left unaddressed with cosmetic changes done for public consumption. As per the reforms bill Banks can continue trading derivatives to hedge risks for interest rate and foreign exchange contracts which is actually over 90% of the derivative markets with a notional value of $216.5 trillion in the first quarter according to the U.S. office of the comptroller of currency.
These deals will however be now cleared through a central counterparty, a new regulatory office which again may be as effective as the CFTC or the SEC considering the clout of the big six banks JP Morgan Chase, Citigroup, Goldman Sachs, Morgan Stanley, Bank Of America and Wells Fargo who control 95% of this market.
The remaining of the Credit Default Swaps which are not standard documents, mainly in agriculture, energy, housing, metaland equity swaps etc. and which can be tailormade and written by any Banker, can be traded through seperately capitalized subsidiaries of the Banks and the Banks will have 2 years to move these instruments, to these trading arms. In short the ponzi markets will remain intact, and 90% of it directly under the control of the Banks, but deals ( several hundred thousand contracts per day exeecuted through high speed computer trading) will be rubberstamped through a independant counterparty.
Now with House Financial Services Chief Chairman Barney Frank's deft handling of the week long debate, that steamrolled the reforms bill with an transparent open air televised debate, it could become a law within the coming weeks instead of a pingpong ball for months. That was the major victory that the lawmakers achieved.
They could always claim....."something is better than nothing" as they achieved a last minute gate crashed solution before President Obama flew to Canada to meet an increasingly diffident G 20 head of states, each pursuing their own goals for economic recovery.
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