Jeremy Grant wrote a piece on the no Federal assistance of clearinghouses section of the Lincoln bill in today’s FT. He noted that both Gensler and SEC head Mary Shapiro came out in support of this provision. He also argued that their position is quite wrong.
That Gensler is wrong is no surprise; I’ve thrown out watches that were right more often than he is.
Gensler and Shapiro are jumping on the “no bailout” populist bandwagon. Now I also oppose bailouts, but one of my main criticisms of this section, and the arguments raised in its support, is that they confuse the operation of the Fed as a lender of last resort against good collateral, and a true bailout which uses taxpayer money to protect creditors. It is a crucial distinction, and one that Gensler and others apparently either don’t understand or are deliberately ignoring.
I noted in my earlier post on this subject that Bernanke’s Fed has certainly created confusion by pushing the LOLR concept beyond all previous limits. But that’s reason to put limits on the Fed generally; it’s not a reason to cut off CCPs and other crucial derivatives intermediaries from access to even legitimate LOLR functions. Section 106 throws out the baby with the bath. It prevents creditor saving bailouts, but also does not permit systemically stabilizing use of LOLR powers.
The IMF supports central bank lending to CCPs backed by good collateral. The Europeans recognize it too: note that some European CCPs, notably Eurex and LCH.Clearnet SA (the French part of LCH.Clearnet) have access to the ECB.
It’s important to recognize fundamental distinctions. The Lincoln bill doesn’t. Nor do its cheerleaders, Gensler and Shapiro. This failure will have serious consequences if the provision becomes law.
It’s also interesting to note that on Monday Gensler refused to come out one way or another on the provision. In fact, he was so evasive that he even acknowledged that he was not answering the question. What changed between Monday and Wednesday, when he said he supported the Lincoln provision? Orders from on high? Or a calculation on the direction of the political winds? (Note that I exclude reasoned consideration of the economic issues from the possible explanations. Why waste time on sets of measure zero?)
[Added bonus from the last link: Gensler Metaphor Alert!:
"Just like a street light protects you from dark and dangerous highways, we need something to protect us from the dark and dangerous market that is right now is OTC derivatives," Gensler said.
Ever notice that Gensler appears to be really, really afraid of the dark?]
One last interesting story. Senator Judd Gregg blew a gasket, accusing Gensler of a power grab:
CFTC Chairman Gary Gensler answered questions about the bill and its impact at the committee’s “mark-up” of the bill last week, which Gregg called an “affront” and a “pretty heavy sign” that he was leading the charge on the reforms.
“It’s trying to consolidate as much power as possible … in-house, and give the chairman of the CFTC basically massive authority over this market at levels never seen before,” Gregg said.
Gregg said Lincoln’s proposals, the bulk of which Dodd has agreed to merge with his bill once debate begins, are meant to penalize large players in OTC derivatives whose risky trades have been blamed for part of the recent financial crisis.
“I thought I’d woken up in Argentina in 1950,” Gregg said, describing his reaction to the Lincoln proposal.
“That bill is essentially a document that is written by people who do not believe in markets, do not believe in capitalism, and hate profit, and basically see … government as being the correct arbiter of almost anything that has to do with markets,” Gregg said.
Though I take pretty much anything any senator has to say with a huge grain of salt, I have to say that Gregg is pretty much on the money. Yeah, the don’t cry for me Argentina thing is hyperbole, but the fact that the entire legislative effort is driven by people who do not believe in markets is spot on. As is the assertion that Gensler is engaged in a massive power grab.
The sad things are that (a) he’ll probably succeed, (b) his agency is completely incapable of responsibly and effectively exercising those swollen powers (especially with Gensler at the controls), and (c) (a)+(b)=a future crack up that is appalling to contemplate.