Paul Richards

America Needs an Independent Clearinghouse for OTC, CDS

For some great background on CME Group, check out this link.

The part that is especially compelling deals with the Clearinghouse:

powerhost.powerstream....

CDS Clearing Houses Could Magnify the Market Disruptions

For more on this topic, and somewhat the opposite point of view, please see my article at:

seekingalpha.com/artic...

America Needs an Independent Clearinghouse for OTC, CDS

While “Dining at the Taxpayer Buffet,” online.wsj.com/article..., the front page of today’s Wall Street Journal highlighted their analysis that shows that financial giants, who are getting huge injections of federal cash, owed their executives more than $40 billion for past years' pay and pensions as of the end of 2007. online.wsj.com/article....

We can now confirm what those of us that have been close to the market have always known - that the investment banks that put our economy into this pickle to begin with, will now use taxpayer "bailout" money to reward those executives who caused the mess.

Not only that, but instead of lending the money out, they are using the money for mergers and acquisitions and capital expenditures to try and keep the market as it was. The government's clear intention was to increase the amount of lending and to free our economy of the credit crunch.

At least, that was the sound-bite we received on the evening news, when they railed against executive compensation.

A fiction writer would have trouble concocting a story line like this.

“Worst of all are the political incentives that are unleashed when Washington promises to spend a trillion dollars (and counting). No one can spend such money wisely even if they want to. The information about who needs to be bailed out and who needs to fail is too complicated. Inevitably, such decisions will begin to be more about politics than economics. The banks were first.” online.wsj.com/article....

Why might that be? Could it be because “Goldman’s presence in the department and around the federal response to the financial crisis is so ubiquitous that other bankers and competitors have given the star-studded firm a new nickname: Government Sachs?” www.nytimes.com/2008/1....

So Government Sachs is going to be making a decision, perhaps today, on which clearinghouse will win the sweepstakes to clear the toxic credit default swaps market. Will it be ICE or CME?

“Jeff Sprecher, chief executive of ICE, said banks are committed to the credit-default-swap market despite the prospect of tighter regulation and higher capital needs. He said ‘capital efficiency’ in this market isn't a priority of many banks, who are willing to pay more to retain their dominance in trading.” online.wsj.com/article....

So the investment banks will give up capital efficiency in order to “dominate trading.”

Just what does this mean?

It means that this whole thing does not pass the “smell test.”

That about says it all. In order to control order flow, control trading and to control the ‘game’, the investment banks, at the public trough to pay execs who caused the crash of the economy, will use their political clout and government connections to ensure that they continue to ‘dominate trading.’

Ask yourself, how is it that they derive such a huge percentage of their gross income from their proprietary trading groups? No one can be that good, can they?

Then ask yourself, why is it that they trying to create dark pools of liquidity?

What could possibly be wrong about exposing some sunshine in there? Just what exactly are they trying to hide?

The SEC should change the rules to make sure that the playing field is level and not rigged in favor of these banks. All orders should see the market so that everyone can compete, and the markets should be transparent.

This should not be done by federal mandate, which may be compromised by circumstance, or in some shady, smoke-filled back room.

The American taxpayer is demanding that there be a fair, open, and free-market competition for this CDS clearing business.

And let the best exchange win.

America Needs an Independent Clearinghouse for OTC, CDS

The Wall Street Journal reported on October 21st that "lobbying backlash builds in Congress." It seems that the same investment banks that put us in this crisis, and then went to Washington with their hands out for the bailout, are now using the bailout money to lobby on their own behalf! Senator Diane Feinstein said, "Federal dollars were not intended to be used for lobbying, and it would be unconscionable for these companies to misuse taxpayer dollars in this way."

The article goes on to say that Goldman, Morgan Stanley and Merrill are amongst those whose third-quarter lobbying "all equaled or exceeded the previous quarter." And this is after they went on the dole!

Imagine the chutzpah!

Does it defy belief that if they would use taxpayer money to lobby the government on their own behalf that they might also try to set up their own bucket-shop?

Let’s hope that all of these shenanigans do not end up costing we, the taxpayer, any more than they already have.

This Friday, let’s see if the Fed does the right thing and awards the $55 trillion credit swaps market to an independent clearinghouse, with a history of no defaults, or if our tax dollars were used to lobby and buy this market from Washington.