Unfortunately for taxpayers, some of these efforts are gaining traction, particularly regarding the regulation of derivatives and mortgages.
As you may recall, Dodd-Frank was supposed to shed light on derivatives trading so that the risks and costs of these instruments would be clear to regulators and market participants. To this end, the law required derivatives to be cleared and traded on exchanges or through other approved facilities. But Dodd-Frank contained a big loophole: the Treasury secretary can exempt foreign-exchange swaps from the regulation.
Currency trading is enormous: on average, about $4 trillion of these contracts change hands each day. Major banks are huge in this market. According to the Comptroller of the Currency, trading in foreign-exchange contracts generated revenue of $9 billion in 2010 at the nation’s top five banks. That’s more than was produced by any other type of derivative.
No one was shocked when the banks began pushing the Treasury to exempt these swaps from regulatory scrutiny. From last November through January, Treasury officials met to discuss foreign-exchange swaps with 34 representatives of large financial institutions, the Treasury’s Web site shows.
A spokesman for Timothy F. Geithner, the Treasury secretary, said last week that Mr. Geithner had not made up his mind on this matter. If Mr. Geithner sides with the banks, he will have bought into their argument that foreign-exchange swaps are different from other derivatives, that this market performed ably during the financial crisis and does not need additional oversight.
OTHERS disagree. Testifying before the House Financial Services Committee in October 2009, Gary Gensler, the chairman of the Commodity Futures Trading Commission, said: “Any exception for foreign-currency forwards should not allow for evasion of the goal of bringing all interest rate and currency swaps under regulation to protect the investing public.”
Dennis Kelleher, the president of Better Markets, a nonprofit organization that promotes the public’s interest in capital markets, said he was dubious of the contention that the market for foreign-exchange contracts performed well during the turmoil of 2008. Mr. Kelleher said that the only reason this market did not seize up like others was that the Fed lent huge amounts — $5.4 trillion — to foreign central banks through so-called swap lines during the fall of 2008.
“We suggested that Treasury hire truly independent experts to look at the data and provide the secretary with advice on whether or not the FX market performed well in the crisis and whether the exemption should be granted,” he said.
The analysis could be done within 60 days, he said. The Treasury told him it was confident that it had all the information it needed. “Their response was, ‘Thank you,’ ” he said.
Big financial institutions are also eager to return to the days of lax mortgage lending, judging from two initiatives being discussed in Washington. Both are intended to get the home loan market moving again — and to buoy falling home prices.
One relates to how regulators define a “qualified residential mortgage,” a term of art in the Dodd-Frank law. Issuers of asset-backed securities that are made up of such loans needn’t keep any credit risk of those securities. But sellers of loan pools that don’t consist of qualified mortgages are required to retain some of the risk in them. This provision was meant to eliminate the perverse incentives of the mortgage boom, when packagers of loan pools were encouraged to fill said pools with toxic waste because they had little or no liability for the deals once they were sold.
What constitutes a qualified mortgage has become a battleground issue because of the risk-retention rules under Dodd-Frank. Qualified mortgages should be of higher quality, based upon a borrower’s income, ability to pay and other attributes to be decided by financial regulators.
The board of the Federal Deposit Insurance Corporation will hold an open meeting on Tuesday to discuss qualified mortgages and the risk-retention rule. Among the questions to be considered is how much of a down payment should be required in a qualified loan, and whether mortgage insurance can be used to protect against the increased risks in loans that have smaller down payments.
The use of mortgage insurance during the boom effectively encouraged lax lending. Investors who bought securities containing loans with small or no down payments were lulled into believing that they would be protected from losses associated with defaults if the loans were insured.
But when loans became delinquent or sank into default, many mortgage insurers rescinded the coverage, contending that losses were a result of lending fraud or misrepresentations. When they did so, the insurers returned the premiums they had received to the investors who owned the loans. Lengthy litigation between the parties is under way but has by no means concluded.
Article source: http://feeds.nytimes.com/click.phdo?i=92a10a5ec2528d19687d9eb900a891b6