So sayeth Michael Palin, in the priceless Monty Python Argument Clinic Sketch. In his recent testimony before the Senate Ag Committee, CFTC Chairman Gary Gensler makes an unconnected series of assertions (many categorically untrue) intended to establish a proposition. Here’s the SWP annotated version:
First, standard OTC transactions should be required to be cleared by robustly regulated central counterparties. [That’s the proposition to be “proved.”] By guaranteeing the performance of contracts submitted for clearing, the clearing process significantly reduces systemic risks. [Unsupported assertion. Also not necessarily true.] Through the discipline of a daily mark-to-market process, the settling of gains and losses and the imposition of independently calculated margin requirements, regulated clearinghouses ensure that the failure of one party to OTC derivatives contracts will not result in losses to its counterparties. [Categorically untrue for multiple reasons. OTC derivatives typically marked-to-market; indeed, the AIG debacle that Chairman Gensler’s trots out repeatedly to scare people into supporting him came to a head due to mark-to-market. Moreover, mark-to-market provides no guarantee that third parties, including clearing member customers and other members of the clearinghouse, will not incur losses.] Right now, however, trades mostly remain on the books of large complex financial institutions. These institutions engage in many other businesses, such as lending, underwriting, asset management, securities, proprietary trading and deposit-taking. [So? What are the logical consequences of this? Mightn’t there be economies of scope in these activities? If there aren’t, why has the market evolved in this way? Could it be the case that offering a broad array of financial services to its customers a financial institution generates information that lowers the costs of intermediation?] Clearinghouses, on the other hand, are solely in the business of clearing trades. [So? again. This is a completely, utterly unsupported assertion related to the economies of scope, or lack thereof, in financial intermediation. Again begs the question of why, if this is the efficient arrangement, it didn’t prevail in the competition of the marketplace.] To reduce systemic risk, it is critical that we move trades off of the books of large financial institutions and into well-regulated clearinghouses. [Conclusion completely unsupported by previous statements.]
I believe that all clearable transactions should be required to be brought to a clearinghouse, regardless of what type of entity is on either side of the trade. This would remove the greatest amount of interconnectedness from the large financial institutions. [Again, no support for this assertion. Moreover, no explanation as to how a clearinghouse that by its very nature connects large financial intermediaries and their customers “remove[s] the greatest amount of interconnectedness”–WTF that means.]
In Energy MetroDesk John Sodergreen reports that a lobbyist says that Gensler is a rock star in Congress because “no member has a clue what they’re actually proposing in the financial reform area–and Gensler does.”
I judge the first part of this statement (e.g., no Congressional clue) to be true, with near metaphysical certainty. As the foregoing deconstruction of Gensler’s testimony shows, the post-dash statement is not. Indeed, how could people who don’t have a clue know whether what somebody is telling them is BS or not? The endorsement of the self-admittedly ignorant (see my earlier post on the NPR guys who interviewed 13 House Financial Committee members) somehow proves Gensler’s wisdom? Huh?
[I give John S. kudos. He managed the very difficult task of saying nice things about me and Gensler in the same edition of the same publication. I am billed as "one of the CFTC's most ardent critics." One of? I guess I have work to do.]
It is a sad day when the main question I have is whether the best metaphor for the current financial regulation reform is the aforementioned Argument Clinic Sketch, or the “Burn the Witch” scene from Holy Grail. That’s a very hard call.