Congress: The Charade of “What is Best for End Users” Is Over
December 12, 2010, The Derivative Project presented Congress and Mr. Gensler a “to-do” list for reforming OTC Derivatives and meeting end users’ hedging needs. Congress, it is time for serious debate on this alternative. Taxpayers deserve no less than thoughtful debate, after the destruction of our economy through derivative speculation in credit default swaps. This is a bi-partisan issue and it is abundantly clear the chicanery has reached its end.
What has Changed from last December to Require Congress to Consider Significant Alternatives to the OTC Markets?
I. Clearinghouses will Not End Systemic Risk for U.S. Taxpayers
- Here is a
/files/6/7/3/9/5/268450-259376/_Advisers_Seek_Distance_From_a_Report___NYTimes_com.pdf”>New York Times yesterday about this fraud. Mr. Sorkin writes:“The findings are clearly meant to scare politicians and drum up public support — just as financial regulators are set to testify on the issue before a Congressional committee on Tuesday. And at first blush, the study would seem to be good ammunition for the Chamber of Commerce and its other supporters.The study was conducted by Keybridge Research, a seemingly independent economics and public policy consulting firm. The firm’s bona fides include an all-star roster of academics, including Joseph E. Stiglitz, a Nobel laureate in economic science; David Laibson, a professor of economics at Harvard, and Stephen P. Zeldes, a professor of economics and finance at Columbia’s Graduate School of Business.But a closer look at the report raises some serious questions. For one, the findings seem oddly out of step with the views of some of the group’s luminaries, including Mr. Stiglitz, who is advertised on Keybridge’s site as an adviser.How could that be?Well, it appears that Mr. Stiglitz and many of the firm’s advisers are not advisers at all.“This is the first I have heard about it,” said Mr. Stiglitz, who just returned home on Sunday after a five-week trip abroad. He said he was surprised to be listed on the group’s Web site. After reading the study, he said, “It’s not a very good report.”Some of the firm’s other so-called advisers must have agreed with him.As I made calls about the relationship between Keybridge and the academics, names mysteriously disappeared from the group’s site on Monday. By the end of the day, Keybridge’s list of affiliated advisers had shrunk to four, from seven.”Dairy Farmers, Do You Honestly Believe OTC Derivative Dealers Will Treat You Differently than the End Users Suing the Derivative Banks on OTC Derivative FX Price Gouging?It appears there is no end user need for OTC derivative contracts, except in the foreign exchange markets, although the OTC derivative players keep manipulating end users into believing they need these contracts.Here is the latest example. The derivatives players went to the dairy industry and got them to testify before Congress that they will be harmed without the OTC contracts. Here is a a link to a FINCAD post earlier today. (Note FINCAD profits derive from advising end users on risk management analytics and software, involving OTC derivatives)What the dairy industry does not know is what are the increased costs they pay for these OTC contracts, that could be saved through price transparency by hedging the risks on standardized futures contracts. What the dairy industry doesn’t know is what increased regulatory costs they will pay to have these OTC derivatives.Why does the dairy industry believe they will be treated any differently than the end users that are suing custody banks for price gouging in foreign exchange derivative contracts?The dairy farmers don’t have increased costs, as Mr. Simon J
- Here is a link to a Wall Street Journal article of lawsuits by end users on price gouging in the OTC foreign exchange markets, Here is a link to Simon Johnson, MIT economist on the deception presented to Congress yesterday:
ohnson pointed out in his /files/6/7/3/9/5/268450-259376/Betsy_Jensen__Reap_What_You_Swap___NYTimes_com.pdf”>New York Times, now it is the dairy farmers, being manipulated by those seeking to take a greater slice of their hard-earned dollar.In sum, U.S. taxpayers will vote out of office those, Republicans or Democrats, that continue to support these lies and deceits. It is time for real debate. The OTC derivatives market is now obsolete.Here are the questions Congress must debate for the End Users and all U.S. taxpayers:
Congress, end users and commercial banks will design a foreign exchange market to accommodate end users hedging needs, that ensures price transparency and customized contracts for specific hedging date requirements. This new system will detail the management of systemic risk and outline the costs for U.S.taxpayers.
- When are custom contracts needed? What contracts should move to futures exchanges? The Derivative Project would argue, end users may need OTC derivatives to hedge foreign exchange exposures for a certain date and amount. Other than that, OTC custom contracts are unnecessary and serve only for the major derivatives banks to speculate, embed higher transaction costs to the end user and obscure real price transparency, that serves to create greater systemic risk.
- What are the true costs of regulating OTC derivative contracts? If OTC contracts continue, who should absorb these regulatory costs?
- Are U.S. taxpayer regulatory costs higher for OTC derivative markets, than for regulating futures markets? If so, why should the U.S. taxpayer be forced to support these costs, when the money could be better used for infrastructure development?