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Team Obama punts again on derivatives

The Obama administration formally sent its plan for regulating derivatives to Capitol Hill today. And to no one’s surprise, the key proposal in the 115-bill is a plan to regulate “standard” derivatives on regulated exchanges of clearinghouses.

As I’ve pointed out a number of times, Team Obama has yet to come-up with a workable definition for a standard derivative. The administration seems content to kick the issue down the road.

The bill would leave it up to the discretion of the CFTC and SEC to develop a definition of a standard derivative. The agencies have up to 180 days after the law is enacted to formulate a definition.

Team Obama says the definition should be as broad as possible and says regulators should consider things like trading volume in specific transactions and whether agreements have similar terminology. Also, in a bit of circular sounding reasoning, the bill says:

What derivatives, porn have in common

The key to the Obama administration’s plan to bring order to the murky world of derivatives ultimately rests on the definition of what is a standard run-of-the mill derivative.

That’s because Team Obama wants the vast majority of derivatives — financial instruments that derive their value from an underlying stock, bond or other asset — to get traded on regulated and well-capitalized exchanges and clearing houses.

It’s not all golden at Goldman

It’s hard to find much to quibble about with Goldman Sachs’ second-quarter performance–at least from a dollars perspective.

You just don’t expect to find many landmines in a 10Q, when an investment firm manages to take in more than $100 million in revenues from trading on 46 days. 

Barclays’ yo-yo balance sheet

Talk about deleveraging. By far the most striking number in Barclays’ first-half profits concerns its balance sheet:

Our total assets decreased by £508bn to £1,545bn over the first half of 2009.

Given the stated desire by regulators – and investors – for banks to shrink their balance sheets, a 25 per cent reduction in total assets in the space of just six months has to be applauded, right?

Lehman D-Day

It’s taken awhile, but a deadline for filing claims in the Lehman Brothers bankruptcy has finally been set and it’s Sept. 22.

A Sept. 15 deadline, the one-year anniversary of Lehman’s collapse, would have been more appropriate. But maybe that would have just been rubbing everyone’s face in it.

Geithner comes up empty

Tim Geithner took center stage on Capitol Hill today and once again he disappointed.

Geithner went before Congress to sing the praises of the Obama administration’s plan for regulating derivatives–something that’s much needed. But once again, Geithner failed to explain the criteria that will be used to distinguish standard derivatives from so-called customized derivatives.

Contrarian Capital…not so much

With a name like Contrarian Capital one would think this Greenwich, Conn. hedge fund would have been savvy enough to sniff-out the impending trouble at Lehman Brothers. But apparently, the managers of Contrarian weren’t contrarian enough.

A week ago, Contrarian filed a rather large $100 million notice of claim in the Lehman bankruptcy, an indication that it was a bit too bullish on the failed investment house. But what makes the claim really interesting is that it stems from losses on Lehman-issued structured notes–something often sold to retail investors.

When derivatives go bad

THUD! That’s the sound a busted derivative trade makes when it lands at the courthouse steps.

Drake Capital Management, once a highflying hedge fund manager that is now winding down its operations, claims it’s still owed some $102 million on a derivatives trade that went kablooie when Lehman Brothers filed for bankruptcy. Like most of Lehman’s thousands of creditors, the New York hedge fund hasn’t been paid a penny.

The DIY way to track derivatives

With all the talk about greater regulation of derivatives, there already is one way for average investors to get a glimpse into this murky world of high finance–although calling it a glimpse might be overstating things.

A three-year-old electronic registry managed by The Depository Trust and Clearing Corporation currently captures information regarding more than 95% of the world’s credit default swap transactions. The DTCC gathers information on the parties to a CDS transaction, the name of the underlying bond that a CDS buyer is obtaining default insurance on, the value of the transaction and the termination date of the trade. 

Indexing the elite’s creditworthiness

This isn’t such a good sign for developed nations. Markit, the administrator of popular credit derivative indexes, has created another long-winded index, the Markit iTraxx SovX G7, to track the ups and downs in default risk perceptions of elite industrialized nations.

Sure, the index is part of a suite of indexes that will track the sovereign risk of other nations, but its inclusion is symbolic of how far developed nations like the US have fallen. I remember one journalist being heckled after he raised even the prospect of the US losing its AAA status a few years back. Now you can’t get away from the back and forth debate of ”is it or isn’t it worthy.”

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