Guest Post: “We Are in a Cabal… Five or Six Players … Own the Regulatory Apparatus. Everybody Is Afraid to Regulate Them”

Washington’s Blog

Harold Bradley – who oversees almost $2 billion in assets as chief investment officer at the Kauffman Foundation – told the Reuters Global Exchanges and Trading Summit in New York that a cabal is preventing swap derivatives from being forced onto clearing exchanges:

There is no incentive from the moneyed interests in either Washington or New York to change it…

I believe we are in a cabal. There are five or six players only who are engaged and dominant in this marketplace and apparently they own the regulatory apparatus. Everybody is afraid to regulate them.

Indeed, as I wrote last May:

In at least one area – one of the most important causes of the financial crisis – reform has already been defeated.

By way of background, the derivatives industry has volunteered (once again) to regulate itself.

As Newsweek noted April 10th, the big boys were using bailout money to aggressively lobby against the regulation of credit default swaps:

Major Wall Street players are digging in against fundamental changes. And while it clearly wants to install serious supervision, the Obama administration—along with other key authorities like the New York Fed—appears willing to stand back while Wall Street resurrects much of the ultracomplex global trading system that helped lead to the worst financial collapse since the Depression.At issue is whether trading in credit default swaps and other derivatives—and the giant, too-big-to-fail firms that traded them—will be allowed to dominate the financial landscape again once the crisis passes. As things look now, that is likely to happen. And the firms may soon be recapitalized and have a lot more sway in Washington—all of it courtesy of their supporters in the Obama administration…

The financial industry isn’t leaving anything to chance, however. One sign of a newly assertive Wall Street emerged recently when a bevy of bailed-out firms, including Citigroup, JPMorgan and Goldman Sachs, formed a new lobby calling itself the Coalition for Business Finance Reform. Its goal: to stand against heavy regulation of “over-the-counter” derivatives, in other words customized contracts that are traded off an exchange…

Geithner’s new rules would allow the over-the-counter market to boom again, orchestrated by global giants that will continue to be “too big to fail” (they may have to be rescued again someday, in other words). And most of it will still occur largely out of sight of regulated exchanges…

The old culture is reasserting itself with a vengeance. All of which runs up against the advice now being dispensed by many of the experts who were most prescient about the crash and its causes—the outsiders, in other words, as opposed to the insiders who are still running the show.

And today, Treasury gave the financial giants exactly what they wanted. As Bloomberg writes in an article entitled Wall Street Derivatives Proposals Adopted in Treasury Overhaul :

Wall Street’s largest banks are getting what they want in the U.S. Treasury’s plan to regulate over-the-counter derivatives by making all market participants adhere to the same capital requirements…

The banks appear to wish to maintain the intra-dealer market and raise barriers to new entrants to keep the OTC business as compartmentalized as possible and to protect their profitable market conditions,” said Brad Hintz, an analyst at Sanford C. Bernstein & Co. in New York. “The Street’s lobbyists appear to be asking for a ‘club’ structure in OTC trading.”…

The bank-written plan, titled “Outline of Potential OTC Derivatives Legislative Proposal” and dated Feb. 13, said the systemic regulator “shall promulgate rules” requiring “capital adequacy,” “regulatory and market transparency” and “counterparty collateral requirements.”

Hintz said Wall Street revenue from trading fixed-income, commodities and currency swaps in the over-the-counter market may be reduced by 15 percent under the Treasury’s changes. “Limiting potential competition” in the market “may not be an unreasonable position to take” by the banks due to the potential loss of income, he said

Investment banks fought regulation of OTC derivatives for more than a decade because the contracts provide a significant portion of bank earnings.

Do you get it?

Instead of “blowing up or burning” over-the-counter CDS – as nobel economist Myron Scholes urged – or making any other real changes which would help the economy and the consumer, the rule changes are mainly a p.r. effort by the derivatives industry itself (like the stress tests were a p.r stunt by the banking industry.) The “changes” will do virtually everything the derivatives industry asked for, including guaranteeing the big banks’ profits in selling CDS by keeping out smaller competitors.

Regulation of over the counter CDS has already failed.

And see this.

Given that JP Morgan Chase, Bank of America, Goldman Sachs, Citigroup, and Morgan Stanley together held 80% of the country’s derivatives risk and 96% of the exposure to credit derivatives as of July 2009, those are probably the players to which Bradley is referring.

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About George Washington

George Washington is the head writer at Washington’s Blog. A busy professional and former adjunct professor, George’s insatiable curiousity causes him to write on a wide variety of topics, including economics, finance, the environment and politics. For further details, ask Keith Alexander…


  1. mg

    Just shake my head in disgust and trust in the greed of the other players on Wall Street to bring down this travesty of an economy. Amazing that after two years, trillions and accurate assessments of what is wrong with the obvious need to fix it, that we have finance reform in name only working through congress.

    Darkest before the dawn I suppose.

  2. Francois T

    This recession obviously didn’t hit hard enough and deep enough where it matters, that is, within the ranks of the upper-middle and upper crust. Then, politicians would have the required incentives to do something right.

    As a country, the USA can have all the geostrategic advantages one can wish for, but with a political, financial and media establishment that inept and corrupt, there is no way we will come out of this mess soon…assuming we do come out of it, next time another financial cataclysm hit.

  3. readerOfTeaLeaves

    Government is just one more ‘commodity’ to these clowns, and they’re getting away with it now. Basically, they’re sucking the life out of the very population they need to have putting money into insurance contracts, pension funds, mortgages, savings accounts, and investments.

    Reckless stupidity on steroids.

  4. papicek

    2 thoughts:

    1) I find it noteworthy that the original cabal comment cited here comes from another trader in the market. I’ve been waiting for the rest of Wall Street to begin rebelling against the dominant players. It took long enough. Free market, indeed.

    2) The only reason I can think of that the TBTF firms fear an open marketplace is that ultimately, their balance sheets (and legal filings) are full of funny accounting in the same spirit of Lehman’s questionable repo 105 “sales”. Which would be bad news, but the practice reflects very poorly on the integrity of the market.

    Would people trust their health to pharmaceuticals that hadn’t been thoroughly tested and whose properties known? Would there be airline travel today without the FAA and NTSB working hard to ensure flight safety? Regulation comes from very real, painful experience. Regulation is what can save an industry.

    Someone please remind the TBTF boys of this.

  5. Riggsveda

    Who are these “five or six players”? I want names. Then I want addresses. Then maybe a sentence of lifetime servitude to WalMart while paying off a $1000 loan at 35% interest for the rest of their lives.

  6. kevinearick

    Debt as a Measure of Power

    From the perspective of the motor: the universe runs on fear. Individuals get up in the morning to reduce fear, working to pay off their debt. The motor wants to maximize debt, and, because the starter contacts are welded, it is in the best of all worlds. Last month, it created better than $300 billion domestically, and the voltage potential, the bimodal distribution of income spread, is hitting record levels. From it’s perspective, it is at the peak positive half-cycle.

    This nucleus has developed over several thousand years, during the mega demographic acceleration half cycle. It’s a huge mass, with all kinds of momentum, with a psychology that is absolutely convinced that it possesses the primary inductor. It is a speck in the eye of the universe, but a proposal to it must increase fear/debt creation. The motor wants to accelerate.

    Government is a control capacitor, which knocks the edges off the fear at least cost, by creating an artificial majority, the smallest possible minority to control the majority, to maximize NPV, debt creation over time. It places all kinds of resistors, drag on behaviors, to funnel the circuit.

    Because its method is misdirection, filters to the funnel, its sub-capacitors, through algebraic reduction in their totality, adopt individual anti-motor psychologies. They “think” they are braking, but are actually smoothing the circuit. Once the starter contacts welded, bypassing the control circuit, the larger capacitors began to pull from the smaller capacitors, to serve their own loads, which are also convinced that they are the primary inductors.

    Government is like an ark, with one animal that has all kinds of different parts / extensions, much like a power distribution system. As everyone is now witnessing, it can move debt anywhere, anytime, in any amount, to shield it. A proposal to government requires an anti-motor argument that can pass through the filtering mechanism and become pro-motor. The brake must become the accelerator, a short.

    Net individual liberty is a compound transformer. The great thing about the kids is that their brainwaves are adjustable, in both amplitude and frequency. As they age, most brainwaves fall into an orbit that is feedback re-enforced, of a particular frequency and amplitude range; they rent a particular position in the system with compliance to a particular psychology, the click. They pass through the looking glass as they begin to see only what they are paid to see. Fear is the stick, relieved temporarily by wages.

    Now that the demographic cycle has turned into demographic deceleration, the control circuit loses contact with the transformer and opens, creating a relative short to the motor, because diversity is declining. From the perspective of a growing population, the motor has already completely shorted. A large, but shrinking population is expecting government to re-establish full circuit control. And the rest are basking in the heat of the motor.

    Empires maximize debt, then print. Rinse and repeat. Government is filtering in obsolete waves, and is “unrecognizing”, filtering out variable waves. Left to their own devices, the motor can only proceed to the precipice while the capacitor discharges, there will be no way for the motor to change course, and those with a variable frequency, variable amplitude drive will move on to a completely dynamic system.

    From the perspective of the single frequency, single amplitude mind, all non-complying minds are stupid. An education system designed to funnel kids into such a mode naturally results in a record drop-out rate, and out of a 7 billion person population, the percentage required to build another system, which the old system is specifically built not to see, is quite small.

    The normal prescription for a debt manufacturing machine, running out of fuel, is not going to have the expected result, and the participant filters cannot know that until their sub-systems actually crash, when there is insufficient bias to maintain the circuit.

      1. kevinearick

        in the “old school”, we were taught to do many things, to craft effective solutions. in the “new school”, we were taught to do very little, repetitively and efficiently, in competition with machines. the “new school” economy is inflexible, and brittle stuff breaks. the solution was to replace entire product lines as an economic activity, to feed the debt machine. now, we have one big, broken economy, no money to fix it, and very few people left that remember how all the components in a real economy articulate, none of whom are in charge. the ones in charge have one tool, objective-based management, and the objectives themselves are wrong.

        1. mg

          Your last two posts I read were both interesting metaphors. Appreciate the slight twisting to show the problem from a different viewpoint. Thanks.

        2. kevinearick

          Canada and Aus have similar problems. The 33 M Cad economy is being subsidized, across the system, through the Chinese oil price subsidy, and lately RE, the US military subsidy, and multi-national pass-through transfers.

          If you’re in the CAD/AUS/CHI, keep your eye on the slope everyday.

          Watch for Chinese withdrawal from commodities.

          Canada’s non-renewable resource per capita is much larger, and it has other intangible resources to recommend it.

          Largely, the US-based multi-nationals have carved a big chunk of it out.

          Without oil at $65 +, it would require substantial restructuring, and the education nexus is taking over.

          1. Skippy

            I could start my own T-shirt with kevinearik says: insert gem/pearl of counter speak but, alas that would cheapen the message.

            skippy…thank you!

  7. Greg

    The story that this blog links to, entitled, “Wall Street Derivatives Proposals Adopted in Treasury Overhaul,” seems to be dated May 26, 2009. Is the date incorrect? Or are we talking about old news? The blog post says this is something that happened yesterday.

  8. jdmckay


    So let’s fix it by… naming China a “currency manipulator”? Can’t for the life of me figure out why China would want to keep these guys out

    BTW, enjoyed reading article from Yves’ links today on Chinese hi-speed rail doings. But who needs stuff like that, when all our $$ can go to CDS & such?

    Those silly Chinese…

    Me-thinks it’s time for another AE-P rant to set us all straight.

  9. joe blowe

    Where is the wealth ?
    There is only so much wealth in the world. Wealth is not money.
    The derivatives market is of the order of 650+ trillion dollars. There isn’t that much wealth in the whole world if all its people become slaves to pay for the fees for these transactions.
    See for reference.

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