A Derivative Of The Truth

Obama wants to regulate financial derivatives, the $1 quadrillion elephant in everyone's room.

In its first detailed effort to overhaul financial regulations, the Obama administration on Wednesday sought new authority over the complex financial instruments, known as derivatives, that were a major cause of the financial crisis and have gone largely unregulated for decades.

The administration asked Congress to move quickly on legislation that would allow federal oversight of many kinds of exotic instruments, including credit-default swaps, the insurance contracts that caused the near-collapse of the American International Group.

The Treasury secretary, Timothy F. Geithner, said the measure should require swaps and other types of derivatives to be traded on exchanges or clearinghouses and backed by capital reserves, much like the capital cushions that banks must set aside in case a borrower defaults on a loan. Taken together, the rules would probably make it more expensive for issuers, dealers and buyers alike to participate in the derivatives markets.

The proposal will probably force many types of derivatives into the open, reducing the role of the so-called shadow banking system that has arisen around them.

“This financial crisis was caused in large part by significant gaps in the oversight of the markets,” Mr. Geithner said in a briefing. He said the proposal was intended to make the trading of derivatives more transparent and give regulators the ability to limit the amount of derivatives that any company can sell, or that any institution can hold.

The initiative was well received by senior Democrats in Congress with jurisdiction over the issue. The proposal had been expected, but some lawmakers, impatient with the pace of the new administration’s efforts, had begun moving ahead themselves.

Hinting at a lobbying campaign to come, Robert Pickel, the chief executive of the International Swaps and Derivatives Association, a trade group, said his organization “looked forward to working with policy makers to ensure these reforms help preserve the widespread availability of swaps and other important risk management tools.”

But some in the financial industry say that regulation is inevitable. “Nobody is in a ‘just say no’ mode,” said Steven A. Elmendorf, a former aide to the House Democratic leadership who represents several major financial institutions and groups. “Everybody understands that we’ve been through a financial crisis and that change has to happen. And the only question is how the change happens.”

Which is amusing, as Congress Senate Conservadems have already said no to overhauling foreclosure laws and resoundingly said no yesterday to limiting credit card interest rates. What makes anyone think they are going to allow the really, really big money in the financial sector to be regulated in any way? Derivatives are where the billions in Wall Street bonuses really come from.

What Obama wants then really doesn't matter, since Evan F'ckin Bayh, Ben Nelson, Arlen Specter, Blanche Lincoln, Jon Tester, and the other Conservadems are the ones apparently running the country by foiling that "wildly unpopular and partisan President" at every turn.

Funny how that works.