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The Widening of a Loophole
Wall Street Snaps Its Fingers
by ANDREW COCKBURN

Washington DC

For months now, Congress has been stumbling through an exercise billed as “financial regulatory reform,” purportedly  dedicated to bringing law enforcement to the Wall Street Casino.  One activity notably popular among the gamesters has been the “dark markets” in the $600 trillion derivatives trading markets, not least because trades are executed on a bilateral basis between dealer and customer, with no public price disclosure, at least not until well after the fact.  An analogous situation would be for someone buying stock in, for example, the Apple Corporation, to take the price offered by a broker with no opportunity to see what everyone else is paying that day, or that minute.

This state of affairs is immensely profitable to the banks, who can levy huge spreads between buy and sell prices without anyone being any the wiser, as well and extracting collateral from customers that can be put to profitable use elsewhere.

It has therefore been the hope and aspiration of reformers, and even, professedly, of the Obama Administration, to enforce trading in such derivatives as the infamous Credit Default Swaps onto exchanges where trading activity, pricing, would be visible for all to see.  That’s what Congressman Barney Frank heralded for the bill gestating in his Financial Services Committee; that’s what Congressman Colin Peterson claimed for the amendment to Frank’s bill that emerged from his House Agriculture Committee. 

A month ago, I reported to CounterPunchers that in fact the Peterson amendment contained a poisoned loophole that would in effect render totally emasculate the bill’s efforts to enjoin clean-living exchange trading.   Hidden deep in a thicket of incomprehensible legalese that only a lobbyist could draft or love was a paragraph that defined a permissible exchange (alternative swap execution facility) as, among other things “any voice brokerage facility,” i.e. two people talking on the telephone, exactly as they do business now.  Furthermore, a “confirmation facility” could also count as an exchange, even though such a facility would only report details of a trade well after the fact — not to mention the fact that the main such facility is owned by the major banks.

My CounterPunch report circulated on Capitol Hill.  For a brief shining moment things began to swing the other way.  In particular, the language of the loophole paragraph cited above underwent a subtle change.  “Voice brokerage” and “confirmation facility” disappeared. 

However, last weekend, days before it was to come before the full house for debate, the House Rules Committee posted the final version.  A friendly veteran of such dealings quickly passed on the somber news:

“…It appears the forces of darkness never rest; the House Rules Committee has posted what is likely to be the new derivatives section of the House financial reform bill.  The new definition of [an Alternative Swap Execution Facility] (minus the "A") appears below:  

(49) SWAP EXECUTIONFACILITY.—The term‘swap execution facility’ means a person or entity that facilitates the execution or trading of swaps between two persons through any means of interstate commerce, but which is not a designated contract market, including any electronic trade execution or voice brokerage facility.”

My  veteran informant explained the dark significance of these seemingly innocuous changes:

“This language obviously creates a rather significant loophole for voice brokers, as we discussed earlier.  It is also very odd that it now says "or trading" after "execution."  This seems to open up the same loophole that the "confirmation facility" language did, as the language now reads that an ASEF is a person or thing that "facilitates the execution" of swaps– which means a telephone, a person on the other end of a telephone, or any thing else that helps a swap get traded (as opposed to actually trades it).  In fact it is broader, since now an individual can qualify as an ASEF!  Doesn’t seem to meet the spirit of transparency and exchange-like trading that was supposedly being advanced earlier.”

Readers who might query the relevance of such arcane issues to the world at large should reflect that such trading practices are key to the gargantuan profits of the relevant banks, in particular JP Morgan, ($3 billion from derivatives in the last quarter alone) and that without them they might not survive in their present inflated form.

ANDREW COCKBURN is the co-producer of American Casino, the widely acclaimed  documentary that chronicles and explains the ongoing financial disaster. He can be reached at: amcockburn@gmail.com