By Pam Martens and Russ Martens: September 6, 2019 ~
Based on every meaningful investigation into the epic financial crash of 2008 that resulted in the worst economic crisis in the U.S. since the Great Depression, derivatives that were concentrated at Wall Street’s largest banks played a central role in the crisis. And yet, 11 years later, neither Federal regulators nor Congress have meaningfully reined in these risks.
Three years ago we reported on President Obama’s press conference of March 7, 2016 where Obama overtly misled the American people about how Wall Street banks were complying with the 2010 Dodd-Frank financial reform legislation that mandated that the banks’ trillions of dollars in dangerous derivatives be centrally cleared rather than traded as opaque private contracts between two counterparties.
President Obama stated during this press conference that “you have clearinghouses that account for the vast majority of trades taking place.” That wasn’t true then and it’s still not true, nine long years after the Dodd-Frank legislation was signed into law.
Sitting two seats away from Obama at that press conference was Mary Jo White, then Chair of the Securities and Exchange Commission (SEC). Sitting directly across the conference table from Obama was Thomas Curry, then head of the Office of the Comptroller of the Currency (OCC). Both White and Curry had to know that the President’s statement was false, and yet, they made no effort to correct the public record.
It wasn’t that Obama was off by a small margin of error. It was that the President of the United States had flipped the truth on its head. Instead of the majority of derivatives being centrally cleared, the vast majority were still shrouded in darkness.
As the Federal regulator of national banks (those with branches in multiple states), the OCC is the official tabulator of cleared versus non-cleared derivatives at the handful of Wall Street mega banks that account for 90 percent of all derivative contracts. The OCC’s quarterly chart shown directly below for the period ending March 31, 2016, explains just how far from the truth the President’s statement actually was. Instead of the “vast majority” of derivative trades being centrally cleared, only 36.5 percent were being centrally cleared, meaning that 63.5 percent were not being centrally cleared.
If the President of the United States can tell a big lie about derivatives reform, apparently the central bank of the United States, the Federal Reserve, feels confident to do the same. In its November 2018 “Financial Stability Report,” the Federal Reserve first correctly explains that at the time of the 2008 financial collapse “Over-the-counter derivatives markets were largely opaque. And banks, especially the largest banks, had taken on significant risks without maintaining resources sufficient to absorb potential losses.” But then the Federal Reserve delivers this whopper of a falsehood to the American people:
“By some estimates, the percentage of such activity that is centrally cleared now exceeds 60 percent.”
While it may be true that some countries in Europe enjoy that 60 percent statistic, it’s the big dangerous mega bank holding companies on Wall Street that the Federal Reserve supervises and is expected to be talking about.
The newly released Table 12 from the quarterly OCC report shows that as of March 31, 2019, the vast majority (57.6 percent) of derivatives in the United States were not centrally cleared. The most dangerous type of derivative, credit derivatives, had the worst showing with only 27.7 percent being centrally cleared.
Another effort to mislead the public came in a highly unusual YouTube video released by the Commodity Futures Trading Commission (CFTC) on July 10 of this year. The video pointed out numerous dodgy practices that derivative dealers are using to defraud derivative counterparties. (Why release a video instead of prosecuting the crooks?) But toward the end of the video, Brian Bussey, the Director of the Division of Clearing and Risk at the CFTC, says this about progress being made by Wall Street banks in central clearing of derivatives:
“We are extremely satisfied with the industry’s progress in this area and particularly with the CCP’s (central counterparty clearing) and their clearing members’ efforts…Our data indicate that in the credit derivative space, credit default swaps on on-the-run indices, that is the most recently issued indices, that are subject to a CFTC clearing requirement, have already achieved a 77 percent clearing rate. We are also encouraged to see takeup of central clearing in the single name CDS [credit default swap] space, which is regulated by our fellow market regulator, the Securities and Exchange Commission.”
Bussey, to backup the preposterous assertion that there is something to be pleased about regarding Wall Street’s progress with conforming to the law on derivatives, simply picks out one small segment of the derivatives market and attempts to promote the false narrative that Wall Street is achieving a 77 percent clearing rate.
Curiously, after two decades of Federal government service, Bussey decided to take early retirement at the end of July.