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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.

Can good numbers be bad news?


Barring any unexpected stumbles, and revisions aside, today will be the last time this year that Americans are told their economy is shrinking.

Indeed, the modest one percent decline in second-quarter gross domestic product could be followed by growth rates as high as three percent in the final six months of the year.

The danger of a lost generation


– Christopher Swann is a Reuters columnist. The views expressed are his own —

NEW YORK, July 24 (Reuters) – For the first time in three generations, Americans across the nation are facing the threat of long-term unemployment. Already more than one in four jobless Americans have now been out of work for more than six months, the highest level since records began in 1948.

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.

GM drives route 363, bondholders beware


     The rough justice meted out to General Motors bondholders may have short-circuited the bankruptcy process, but it has damaged the confidence that holders of other debt can have in their right to fair treatment.
    There will be a long-term cost, both to borrowers and lenders as a result. Key to this has been the use — by both GM and Chrysler – of section 363 of Chapter 11 of the U.S. bankruptcy code. By invoking the “emergency” need to restructure the companies, this section has allowed the automakers to speed through the sale of the viable parts of the businesses to new companies and leave the debt behind.
    While route 363 by-passes lengthy court hearings, its use to sell prime assets drives straight through the spirit of the code, which was meant to allow companies going through a Chapter 11 to jettison non-core assets quickly as part of a longer and wider reorganisation. It was not designed to cream off the best ones.
    Lawyers are already invoking the Chrysler and GM examples to try and get round long-established rules for reorganisations.
    The result would be to deprive bond investors of their rights in a company restructuring.
    GM bondholders who would normally have enjoyed preferred credit status in a Chapter 11 were railroaded by the Obama administration into giving the quick-fire sale the go-ahead, on the grounds that this was a one-off.
    From GM’s point of view, the process has worked well, allowing the business to emerge only 40 days after filing for bankruptcy. The cost of the turnaround has been $50 billion in emergency government financing. The longer-term cost in the much bigger market for corporate debt may be far larger.

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.

Your new consumer watchdog


The Obama administration just released draft legislation for its newly proposed Consumer Financial Protection Agency. The 152-bill would create a five-member commission with the power to make rules and issue subpoenas. 

The new agency’s primary mandate will be to push for greater fairness by mortgage lenders and credit card issuers. That’s important stuff. But sadly, the agency’s mandate appears limited. There’s no discussion in the agency’s enabling legislation that would specifically permit it to look at things like life settlements, structured settlements or structured notes.

Who will be the global regulator?


BusinessWeek’s Chief Economist Michael Mandel argues here that it may require the creation of a global regulator to control global banks.

He says the Obama administration’s financial regulatory reform package is so “unsatisfying, precisely because in an increasingly global economy it focuses mainly on beefing up U.S. regulation. ” At one time, that would have been enough, he says. But not anymore.

Cut out the carbon middleman


The opposition by the Republicans to the idea of carbon trading is a bit baffling, given that it is a classic Wall Street-driven solution for dealing with a serious problem.

Sure, carbon trading, which is the centerpiece of the Obama administration-backed American Clean Energy and Security Act, would carry a cost for consumers and companies that emit too much in greenhouse gases. But the economic impact of the bill’s so-called cap-and-trade scheme would be modest — costing the average household $175 a year in added expenses, according to the Congressional Budget Office.