High Time to Corral Financial WMDs Beyond the Bank Bailout (Financial Week)

[struggle4progress]

If congress ever gets around to revisiting its own role in the financial meltdown, it should not stop with the Gramm-Leach-Bliley Act of 1999, which many critics have singled out for responsibility. That law hammered the last nail into the coffin of the Depression-era legislation that kept investment banking separate from its commercial variant. But while such deregulation got banks such as Citigroup and J.P. Morgan Chase deeper into the securitization of bad mortgages that have come back to haunt them, the law had no direct bearing on the meltdown of investment banks like Bear Stearns or Lehman Brothers, or of insurer AIG.

Some blame that part of the mess on Congress' failure to rein in Fannie Mae and Freddie Mac, but such finger-pointing vastly underestimates the role that credit derivatives have played. For that the legislative blame rests squarely with the Commodity Futures Modernization Act of 2000, which barred the Commodity Futures Trading Commission from regulating derivatives such as credit default swaps and collateralized debt obligations. Yet even today, the industry's main lobby, the International Swaps and Derivatives Association, resists calls to create trading systems for such derivatives that would be subject to government regulation, citing the success of last week's settlement of Fannie and Freddie swaps as evidence such change is unnecessary ...

Such evidence is unconvincing in light of the Federal Reserve's decision to take over Fannie and Freddie as well as AIG and to backstop J.P. Morgan's acquisition of Bear. Recall that the commodities “modernization” act also contained the so-called Enron Loophole, a provision that exempted from CFTC oversight what turned out to be the energy trader's most fraudulent operations. The loophole has since been repealed. So should the rest of the law ...

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