THE INFLUENCE GAME: 7 Big Banks Seek Monopoly
By Daniel Wagner, AP Business Writer
March 27, 2009
WASHINGTON (AP) -- A handful of banks that needed government bailouts after making disastrous bets on over-the-counter derivatives are now seeking monopoly control over dealing in that market.
The banks already control a big part of the multitrillion-dollar derivatives market, but they have to compete with broker-dealers, hedge funds and other players. Many industries use derivatives contracts to reduce risk.
For the banks, exclusive access would mean billions of dollars in revenue from derivatives, such as bets on currency or interest-rate changes. They argue that only federally regulated banks should get to deal in these derivatives.
But if the banks get their way, the change could ripple through the economy, opponents warn. It could raise costs for other types of companies that use these financial contracts to reduce their risks.
"You'd think these people (at the banks) would be humbled and just hope they don't end up in jail," said Dean Baker of the left-leaning Center for Economic and Policy Research. "They don't have any qualms about going to Congress and saying what they want ... and they're still in a position to get a lot of things."
Democrats are crafting legislation designed to avert another financial crisis. The seven banks pushing for a monopoly have proposed language for parts of that legislation and are circulating it in Washington.
Remarks by Treasury Secretary Timothy Geithner at a hearing Thursday suggested that Treasury agrees with at least the broad outlines of the banks' proposal. A Treasury spokesman would not elaborate on Geithner's comments.
The seven banks making the play for control are Deutsche Bank AG, Barclays, JPMorgan Chase & Co., Goldman Sachs Group Inc., Credit Suisse Group, Morgan Stanley and Citigroup Inc. Together, they've received more than $125 billion in bailout money. Some of that money came to them from the bailout given to failed insurance giant American International Group Inc.
The value of over-the-counter derivatives hinges on the value of an underlying figure or commodity - ranging from currency rate swaps to oil futures and inflation bets. The derivative reduces the risk of loss from the underlying asset. The global business world holds a staggering $600 trillion of these contracts.
If the big banks succeed in their quest, small- and mid-sized derivatives players - who on their own are unlikely to affect the financial system - will be cut out. The big banks whose derivatives bets helped unleash a global recession would be the sole dealers.
Stifling competition could "reduce investor confidence or inhibit the stability of the markets and the stability of the economy," said Richard H. Baker, chief executive of the Managed Funds Association, which represent investors who rely on derivatives trades.
The banks referred questions to a public relations firm, Prism Public Affairs, they have hired to help with the derivatives campaign. The banks' representative at Prism said he was unaware of any proposed legislation, saying his role was educational. He said the lobbying was taking place among banks' own lobbyists and at the Securities Industry and Financial Markets Association.
Banks are motivated "exclusively by a shared desire to ensure appropriate oversight," said Cory Strupp, managing director of SIFMA, which lobbies for the big banks and other financial firms.
But this month, SIFMA arranged a briefing for staffers on the House Financial Services Committee that included a presentation from the lawyer who drafted the banks' proposal to exclude non-banks from dealing derivatives. The lawyer, Ed Rosen of Cleary Gottlieb Steen & Hamilton, wouldn't comment, citing client confidentiality.
One species of derivative, the credit-default swap, all but destroyed AIG. Banks that bought those loss-protection contracts faced huge losses - until the government stepped in with bailouts that now top $180 billion.
The Federal Reserve said this was necessary because leaving the banks on the hook for failed derivatives bets could have toppled the financial system. The same argument has justified bailouts for other "too-big-to-fail" firms, from automakers to housing lenders.
While winding down its derivatives contracts, AIG gave $37.5 billion to the seven banks that are now seeking a monopoly in the field. That was on top of the $90 billion in taxpayer bailout money the banks had already received.
Nonbank dealers got no bailout money. And since most of them lack the cash to qualify for bank charters, the banks' move could cost the nonbank dealers access to the lucrative derivatives dealing business.
Limiting competition this way could harm the broader economy, some say.
"Less participation has always been bad and always will be bad," because big commercial companies often stabilize speculator-driven price swings by selling derivatives, said James Cordier, president of the derivatives seller Liberty Trading group. The change "is going to cause prices to fluctuate at levels that are not justified by supply and demand," he said.
Former Comptroller of the Currency Eugene A. Ludwig warned against cutting out nonbank dealers because "a lot of innovation comes from smaller enterprises, and there's a place for everybody" under effective regulation.
Geithner did allow that there must be some mechanism for getting more specialized, innovative products into the markets.
Those crafting the new regulatory rules should take care not to "tilt the playing field so that one group - whether it's the larger institutions or the smaller institutions or the shadow banking system - is unduly regulated at the cost of the others," said Ludwig, who's now chief executive of Promontory Financial Group.
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