This is one of those articles that kind of lurks below the surface and the ramifications don't become clear until later. If you go to the bottom of this post, you will also find a link to a reference in Newsweek on the impact of derivatives and US. bank exposure. Why would the government want to supress an organization from doing the study? Why would they supplant it with an inhouse effort? Draw your own conclusions. All I know is that if you read the Newsweek article, contemplate why they might try and block the study and think about the impact of Y2K you will exercise a great deal of caution in selecting which banks to invest in.
Agencies Try to Block Study on Derivatives
By Jerry Knight
Washington Post Staff Writer
Saturday, June 6, 1998; Page E01
The heads of the Federal Reserve Board, the Treasury Department and the Securities and Exchange Commission teamed up Friday to try to preempt the Commodity Futures Trading Commission's plan to study the potential risks of the unregulated multi-trillion-dollar international derivatives market.
CFTC Chairman Brooksley Born announced plans last month for a new review of the vast but lightly scrutinzed derivatives industry, which Congress exempted from federal regulation five years ago.
But yesterday, Fed Chairman Alan Greenspan, Treasury Secretary Robert E. Rubin and SEC Chairman Arthur Levitt Jr., the heads of the three more powerful financial regulatory agencies, demanded instead that the study be done by the President's Working Group, which includes their agencies, along with the CFTC.
In letters to House and Senate leaders, the Greenspan group asked Congress to immediately pass legislation imposing a moratorium on the derivatives study launched by Born "to protect this market from unnecessary and potentially damaging legal uncertainty" that might cause derivatives users to transfer their business offshore.
U.S. banks and financial institutions earn millions by arranging derivative transactions, such as swaps of fixed-rate interest obligations with floating obligations, which are used by businesses to help protect against interest rate changes, currency fluctuations and other economic factors.
But the derivatives themselves may create their own risks, many financial experts fear. Greenspan has warned that the derivatives market has grown exponentially in recent years but has never been tested in an economic crisis -- such as a stock market crash or the collapse of a major currency.
Rubin and Levitt also have expressed concern about the unknown risk of the derivatives market, but they joined with Greenspan yesterday in demanding a halt to the study by the CFTC.
The CFTC regulates futures contracts -- obligations to buy or sell something at a set price in the future -- which are used in much the same way as derivatives to attempt to protect companies against financial risks. The futures markets, which are closely regulated by the government, compete fiercely with the banks and investment firms whose operations are not regulated. There is also regulatory competition between the futures agency and the SEC, Fed and Treasury, which oversee banks and other financial institutions.
A CFTC spokesman said the agency did not get copies of the group's letters to Congress and could not comment on them.
Born did not propose imposing regulations on derivatives when she announced her agency's study last month, the spokesman noted. She said that in the five years since the government decided not to regulate derivatives, the market has expanded so much that a new review of the risks is needed.
c Copyright 1998 The Washington Post Company
washingtonpost.com
Forewarned is forearmed.
Regards,
Brian
4. To get a feel for various bank's exposure to derivatives check out the 25 May 1998 Time Magazine pp.46-50. This should be considered in light of current problems in Asia and it doesn't appear to be getting better anytime soon. Additionally these countries are way behind when it comes to Y2K. The link below has the article but not the table that shows the risk for the various banks. Needless to say Bank Boston has the lowest Risk as a % of bank's net worth at 34% while Morgan Guaranty has the highest at 1114%.
The Banks' Nuclear Secrets
Shaky economies in Asia aren't good places for delicate financial instruments like DERIVATIVES. The fires engulfing Indonesia could scorch American banks
pathfinder.com
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