Senate Banking Committee Chair Sen. Dodd is developing one bill for regulation of the financial sector. The Obama Administration has, of course, made various proposals for regulation. Now two House Democrats--Financial Services Committee Chair Barney Frank and Agriculture Committee Chair Collin Peterson --are indicating that they will push for more transparency and accountability for derivatives in whatever legislation is passed. Unlike the Obama Administration's proposal to exempt foreign exchange derivatives, the two House committee chairs want those to be exchanged either through clearing houses or on exchanges, to ensure greater transparency. See Grim and Nasiripour, Two Leading House Dems to Close $50 Trillion Loophole in Derivatives Reform Bills, Huffington Post (Nov. 18, 2009).
The banks don't like the idea. They still seem to think that they should be able to make money as they have in the past, in spite of the fact that the government has come to their rescue to ensure that they serve the public interest, not their private gains.
Perhaps the greatest problem with derivatives is that letting companies enter into "customized" derivatives with non-trade terms ensures that there will always be ample leeway for avoiding transparency and accountability. Derivatives can be tweaked and engineered to be an 'exclusive' product for each customer. Combine customized derivatives with the shadow financial system of hedge funds and the tangle web of counterparty relationships by which investment banks and hedge funds work together in the capital markets, and we are left with a great deal of space where the sunshine does not reach. Whatever regulation we put in place needs to reveal more about what goes on and perhaps prohibit some of the kinds of interlocking relationshiops that echo too eerily the way investment banks operated in the early 20th century, as described by Louis Brandeis in "Other People's Money."
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