The Derivative Project

Disclosure of OTC Derivatives Fees Could “Cause A Second Financial Crisis” says a major Derivatives Bank

Disclosure of OTC Derivatives Fees Could “Cause A Second Financial Crisis” says a major Derivatives Bank

Custom OTC derivatives are a gold mine for the major derivative players.  The Financial Times reported yesterday Deutsche Bank is being sued by a German end user over excessive fees in an interest rate swap transaction. In the FT article, linked to above, FT reported:
“Deutsche Bank may have acted improperly by not explaining possible conflicts of interest, including the amount it would earn, when entering the deal, a federal court judge in the case said on Tuesday.”  

Deutsche Bank’s response:  
A lawyer for the bank told the court that any judgment requiring banks to disclose margins earned from such business could “open a new door” that might allow a wide range of customer claims against banks over a range of agreements, running into billions of euros and rocking the sector.

Rainer Hall said: “This would shake up the whole market because it would require banks to disclose their profit from a deal. Such a ruling could even cause a second financial crisis”.

A final judgment was unexpectedly postponed until March 22.
Very interesting. Is this a threat? The bolded statement above is symptomatic on what the financial services industry represents in 2011 and why the 2007-2009 financial collapse was so great and why unemployment is still so high. 
The financial services industry has evolved over the past two decades to be an industry built on excessive hidden fee income, in 401ks, in pensions, in mutual fund fees, in OTC Derivatives and in excessive debit card fees.
This statement by Deustche Bank’s attorney, that the “financial industry” could collapse if there are precedents in these lawsuits, in favor of investors, is cause for Congress to move rapidly to have critical debate on what is sustainable economic value.  What does that represent? Is it time to deal with the house of cards that the financial services industry represents? 
Is time to focus on sustainable jobs, effective commercial lending and give up the unhealthy protection of the “hidden” profits of the financial services industry that is weighing down a return to strong, sustainable economic growth for the U.S?
The fix for the U.S. deficit is not to cut the average worker’s social security benefits.  Congress must begin to focus on why we are in this mess, why banks aren’t lending, why we have major deficits.  It is time for creativity and real reform of the financial services industry.
A cost-effective fix is to move OTC derivatives to regulated exchanges.  This would minimize regulatory costs. These “saved” regulatory fees would be used for investing in science and technology education, a much better replacement of “worthless” financial services fee income, that does nothing to build a future for our children.