[Vision2020] One Safety Net That Needs to Shrink

[Art Deco]

  [image: The New York Times] <http://www.nytimes.com/>

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November 3, 2012
One Safety Net That Needs to Shrink By GRETCHEN
MORGENSON<http://topics.nytimes.com/top/reference/timestopics/people/m/gretchen_morgenson/index.html>

ELECTION Day is upon us, and neither President Obama nor Mitt Romney has
really addressed one of the nation’s most pressing economic issues: the
risk that one day taxpayers might have to bail out swashbuckling financial
institutions again.

Granted, the economic pain many are feeling now — the snail’s pace
recovery, the stubbornly high unemployment — is foremost in voters’ minds.
But given all we’ve gone through after the last binge in the financial
industry, failing to confront the too-big-to-fail question is a serious
oversight.

Many Americans probably think the Dodd-Frank financial reform law will
protect taxpayers from future bailouts. Wrong. In fact, Dodd-Frank actually
widened the federal safety net for big institutions. Under that law, eight
more giants were granted the right to tap the Federal Reserve for funding
when the next crisis hits. At the same time, those eight may avoid
Dodd-Frank measures that govern how we’re supposed to wind down
institutions that get into trouble.

In other words, these lucky eight got the best of both worlds: access to
the Fed’s money and no penalty for failure.

Which institutions hit this jackpot? Clearinghouses. These are large,
powerful institutions that clear or settle options, bond and
derivatives<http://topics.nytimes.com/top/reference/timestopics/subjects/d/derivatives/index.html?inline=nyt-classifier>trades.
They include the Chicago
Mercantile Exchange<http://topics.nytimes.com/top/reference/timestopics/organizations/c/chicago_mercantile_exchange/index.html?inline=nyt-org>,
the Intercontinental Exchange and the Options Clearing Corporation. All
were designated as systemically important financial market
utilities<http://1.usa.gov/TYC0Xw>under Title VIII of Dodd-Frank.
People often refer to these institutions as
utilities, but that’s not quite right. Many of these enterprises run
lucrative businesses, have shareholders and reward their executives
handsomely. Last year, the CME
Group<http://topics.nytimes.com/top/news/business/companies/chicago_mercantile_exchange_holdings/index.html?inline=nyt-org>,
the parent company of the Chicago Mercantile Exchange, generated almost
$3.3 billion in revenue. Its chief executive, Craig S. Donohue, received
$3.9 million in compensation and held an additional $10 million worth of
equity awards outstanding, according to the company’s proxy statement.

Make no mistake: these institutions are stretching the federal safety net.
The Chicago Merc clears derivatives contracts with a notional value in the
trillions of dollars. I.C.E. clears most of the credit default
swaps<http://topics.nytimes.com/top/reference/timestopics/subjects/c/credit_default_swaps/index.html?inline=nyt-classifier>in
the United States — billions of dollars a day, on paper. No wonder
they
are considered major players in our financial system.

But placing them at the bailout trough is wrong, according to Sheila Bair,
the former head of the Federal Deposit Insurance Corporation. In a recently
published book, Ms. Bair wrote that top officials at the Treasury and the
Fed, over the objections of the F.D.I.C., pushed to gain access for the
clearinghouses to Fed lending.

The clearinghouses “were drooling at the prospect of having access to loans
from the Fed,” she wrote. “I thought it was a terrible precedent and still
do. It was the first time in the history of the Fed that any entity besides
an insured bank could borrow from the discount window.” .

“The Treasury’s and the Fed’s reasoning was that since another part of
Dodd-Frank was trying to encourage more activity to move to clearinghouses,
we should provide some liquidity support to them,” she said in an interview
last week. “Our argument back was, if you have an event beyond their
control with systemwide consequences, then you have the ability to lend on
a generally available basis. What they wanted was the ability to lend to
individual clearinghouses.”

The clearinghouses have considerable clout in Washington. From the
beginning of 2010 through this year, the CME Group has spent $6 million
lobbying <http://bit.ly/QZFkTR>, according to the Center for Responsive
Politics.

Did these players push for special treatment while avoiding other aspects
of Dodd-Frank? Representatives of the Chicago Mercantile Exchange and the
Options Clearing Corporation say no, noting that access to the Fed meant
they would also be overseen by the central bank, in addition to the
Securities and Exchange Commission or the Commodities Futures Trading
Commission.

But the Fed’s involvement is not likely to be intrusive, because Dodd-Frank
directed it to take a back seat to a financial utility’s primary regulator,
either the S.E.C. or the C.F.T.C.

The CME said that it did not support Dodd-Frank’s designation of
clearinghouses as systemically important, but once it received the
designation, it believed the Fed should provide access to emergency
lending. The O.C.C. echoed this point.

Whatever the case, the CME Group has argued that it should be exempt from
the orderly liquidation authority set up under Dodd-Frank. This authority
was designed to unwind complex and interconnected financial firms that
could threaten the financial system if they failed. The law appointed the
F.D.I.C. as receiver to resolve teetering entities. That authority is
supposed to end the problem of institutions that are too big to be allowed
to fail and also to hold their managers accountable.

BUT in a letter to the F.D.I.C. <http://1.usa.gov/TYCUTY> a few months
after Dodd-Frank became law, the CME Group asked the F.D.I.C. to confirm
that the exchange wouldn’t fall under that authority’s jurisdiction. It is
not a financial company as defined by the law, the CME contended, and
therefore should not be subject to the resolution process.

The F.D.I.C. has not confirmed the C.M.E.’s view on the matter. But it
seems to be gaining traction among other regulators. At an Aug. 2012
presentation last August <http://bit.ly/TYDfGa> on resolving financial
market utilities, Robert S. Steigerwald of the Federal Reserve Bank of
Chicago noted that it was unclear whether a financial utility such as the
Chicago Merc would have to be wound down as required under Dodd-Frank.

So these large and systemically important financial utilities that together
trade and clear trillions of dollars in transactions appear to have won the
daily double — access to federal money, without the accountability.

“Dodd-Frank should have been all about contracting the safety net,” Ms.
Bair said last week.  “But this was a huge and unprecedented expansion
of the safety net that provided expressed government support for for-profit
entities. These financial market utilities are the new government-sponsored
enterprises.”


-- 
Art Deco (Wayne A. Fox)
art.deco.studios at gmail.com
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