The new derivatives trading bill being debated in Congress is a toothless, spineless joke of a bill (authored by Dems) intended to provide oversight and transparency for the unregulated secret $600 trillion market for derivatives. And even after Treasury Secretary Geithner watered down the new bill with exemptions and loopholes for most of Wall Street, the House Republicans still voted against it, insisting that government intervention will, uh, suffocate free enterprise and, um, stifle innovation.
In my mind, regulating a secret $600 trillion market that killed Lehman Brothers, Merrill Lynch, Bear Stearns, AIG, and ignited the biggest economic catastrophe since the Great Depression would be an uncontroversial bipartisan no-brainer that any semi-literate Congressman would support immediately. There are 2 obvious changes that could easily fix the derivatives market:
1) Every buyer and seller of derivatives must prove they have the cash to cover their bets.
2) Every derivative contract must be listed on an exchange. (An exchange is a clearinghouse where trades are made, the most famous examples being the New York Stock Exchange (NYSE) and NASDAQ).
The Big Banks hate both of these new rules, but they really hate Rule #2, the creation of an exchange exclusively for derivatives. And that has puzzled me, because every gargantuan American corporation you can think of (Exxon, Procter&Gamble, AT&T, WalMart) sells its own stock on the NYSE and capitalists love the NYSE. The purpose of an exchange is to provide transparency for buyers and sellers, which increases efficiency and reduces fraud. This is boring old-fashioned Capitalism 101 and it's not particularly radical; the NYSE has flourished since 1792, so what's the problem?
The problem is that the NYSE publishes the price of every stock! And the Big Banks do not want the prices of derivatives published. Because if the prices are published, then the investors who hire the Big Banks as brokers would realize they're being screwed by their own broker. The investors would shop around for better deals from brokers with lower fees and if there's one thing I know about Big Banks, it's that they hate lowering their fees.
Senator Maria Cantwell, (D-WA) explained it this way: "Wall Street has a lot of reasons for wanting to keep the unregulated derivatives casino open for business. Specifically, Sanford C. Bernstein & Co. analyst Brad Hintz recently estimated that Wall Street revenue from trading unregulated derivatives might decline by 15 percent just by moving trades to clearinghouses. That is because the current system enables banks to profit from secret pricing - pocketing the gap between what they charge customers and what they pay to hedge their trades. With transparent pricing and true competition on an exchange, higher gambling returns are much more difficult to achieve. Public disclosure of price data would also mean that dealers no longer had better price data than clients."
In other words, a market with secret prices isn't an honest market, it's a rigged market.
Prediction: rigged markets aren't sustainable. They collapse.