Wednesday, November 10, 2010


Spencer Bachus (R-Al) and Barney Frank (D-Ma)

Alabama Republican Representative Spencer Bachus is poised to take the gavel of the House Financial Services Committee from Massachusetts' Democrat Barney Frank. Front and center on Bachus' agenda is a rollback of the Derivatives Rules. from the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The problems I see with the new Derivatives Rules is that they don't go far enough. The Dodd-Frank Act limited the Securities and Exchange Commission's (SEC's) ability to make rules because they are specifically prohibited from, among other things, imposing reporting, recordkeeping, or disclosure requirements or other prophylactic measures designed to prevent fraud with respect to such agreements, according to SEC website:

The Derivatives Markets was one of the major cancers of the global economic meltdown, from which we are still emerging. The problem was the rampant fraud in the derivatives market, and the Dodd-Frank law forbids the SEC from directly reigning in such fraud. The weak regulations imposed by Dodd-Frank should be strengthened. Bachus wants to roll them back!

During a hearing of the Financial Crisis Inquiry Commission, University of Maryland Law School Professor Michael Greenberger summarized the role of Derivatives and Derivative Markets regulation. You can read the remarks accompanying his testimony in full at the Commission's website:

"By removing the multi-trillion dollar swaps market from the traditional norms of market regulation, a highly speculative derivative bubble was created that was opaque to federal regulators and market observers alike. By removing all forms of ensuring the normal capital adequacy protections of market regulation, the swaps market permitted trillions of dollars of financial commitments to be made with no assurance that those commitments could be fulfilled beyond the highly illusory AAA ratings of the counterparties in question.
The darkness of this huge multi-trillion dollar unregulated market not only caused, but substantially aggravated, the financial crisis. And, the American taxpayer funded the bailouts and rescued the economy from Depression. The banks are now stronger than ever. The taxpayer, however, is burdened by high unemployment, job insecurity, depleted pensions, and little access to credit. We are depending on this Commission to identify correctly the malpractices to ensure that a fiasco of this nature never happens again." 
The Dodd-Frank Act divides regulatory authority over swap agreements between the Commodities Futures Trading Commission (CFTC) and SEC (though the prudential regulators, such as the Federal Reserve Board, also have an important role in setting capital and margin for swap entities that are banks). The SEC has regulatory authority over “security-based swaps,” which are defined as swaps based on a single security or loan or a narrow-based group or index of securities (including any interest therein or the value thereof), or events relating to a single issuer or issuers of securities in a narrow-based security index. Security-based swaps are included within the definition of “security” under the Securities Exchange Act of 1934 and the Securities Act of 1933.

The Wall Street Journal reported Bachus as saying the Derivatives Rules are "one of the job-killing provisions of Dodd-Frank that needs to be addressed," the Alabama Republican said in an interview Wednesday morning, calling the provisions "overly expansive. Mr. Bachus said the new derivatives rules, which will require most routine swaps to be traded on exchanges and routed through clearing houses, will redirect as much as $1 trillion from the U.S. economy, draining capital from the financial system that could be used for loans or job creation." The full article is on the WSJ website:

The timetable for implementation of the Derivatives Rules are reported on the SEC website. They are:

"Implementation: There are approximately 28 rulemakings under Title VII alone, although some of these rulemakings may be combined. Most rulemakings are required to be completed within 360 days of enactment (by July 15, 2011). There are two exceptions:

By October 18, 2010 (90 days after enactment), the SEC must adopt interim final rules for reporting outstanding security-based swaps entered into prior to the date of enactment to security-based swap data repositories or the SEC; and

By January 17, 2011 (180 days after enactment), the SEC must adopt rules to mitigate conflicts of interest at clearing agencies, swap execution facilities, and exchanges.

In addition, the CFTC and SEC are required to act jointly to define key definitional terms relating to jurisdiction (such as swap, security-based swap, and security-based swap agreement) and market intermediaries (such as swap and security-based swap dealers and major swap and security-based swap participants), as well as adopt joint regulations regarding mixed swaps and prescribe requirements for trade repository recordkeeping, and books and records requirements for swap entities, related to security-based swap agreements. The SEC is required to consult with the CFTC and the Federal Reserve Board in the non-joint rulemakings (and with the other prudential regulators on capital and margin rules). The CFTC, SEC and U.S. prudential regulators also are consulting with foreign regulatory authorities on the establishment of consistent international standards with respect to products and entities in this area."
The interim rules mandated by the October 18th deadline can be found online at Comments on these interim rules may directed to the SEC at or by email to or by using the Federal eRulemaking Portal at

Republican Ed. Royce of Fullerton, California has launched a challenge to Bachus over the Chairmanship of the House Financial Services Committee. The Los Angeles Times reported that a concern motivating Royce is that Bachus is better known for doling out surplus campaign cash to other Republican candidates for Congress than he is at the fine art of debate. Debate will be important when going head to head with Barney Frank in any attempt to roll back provisions of Dodd-Frank. The Los Angeles Times article is found at reported at that "Bachus represents the Alabama’s 8th Congressional District and ran unopposed in the 2010 midterm elections. Still, his campaign committee raised $1.3 million and spent $1.5 million in the 2010 election cycle. Meanwhile, his leadership PAC, the Growth and Prosperity PAC, raised and spent the least since 2006. Still, with about $663,000 in the PAC account, Bauchus was able to give sizable donations to more than 70 candidates, including $15,000 to self-proclaimed political outsider Tim Burns, who this year twice ran to represent Pennsylvania’s 12th Congressional District (he got 49% of the vote Tuesday, but still lost to Democratic incumbent Rep. Mark Critz, who beat him during a special election in May), $10,000 to Rep. Roy Blunt (R-Mo.) in his successful quest for a U.S. Senate seat and $5,000 to Sen. Richard Shelby (R-Ala.).  More than $1 million in contributions to Bachus' leadership PAC and campaign committee have come from PACs and individuals in the financial and real estate sectors," (emphasis added).

I've said it before and I'll say it again, campaign finance is legalized money laundering. Spencer Bachus is playing the same legalized money laundering game as Lynn Jenkins and they are each on the Financial Services Committee.  They run against little to no competition, raise more money than they need for their races, use the surplus cash from their campaign committees as a slush fund for other candidates, and take huge chunks of that campaign money from those over whom they have regulatory or oversight authority.  The special interest money flows to and through them to other candidates.  The voters have no idea who is really supporting whom as campaigns are converted into well financed Tsunami's of propaganda.  I've said it before and I'll say it again, campaign finance is legalized money laundering.


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