——— FINANCIAL POLICY FORUM ———
|
www.financialpolicy.org |
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rdodd@financialpolicy.org |
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In
The News
2004
·
CNN, Lou Dobbs,
December 16, 2004
also shown December 20 and 21st
·
CNN, Lou Dobbs
Tonight, October 14, 2004
also shown October 15th
·
CBS MarketWatch, October 12, 2004
also in AFX wireservice
·
Marketplace,
September 24, 2004
·
Barron’s, September 27,
2004
also in
National Post (
·
Dow Jones Newswire,
September 22, 2004
·
Marketplace, July 15,
2004
·
Reuters, July 9, 2004
·
Boston Globe, July 6,
2004
·
CBS MarketWatch,
June 29, 2004 – Derivatives
also in
Investors Business Daily
·
CBS MarketWatch, June 29, 2004 – Fed Rate Hike
also in
Investors Business Daily
·
Insight In The News,
May 24, 2004
·
The Topeka Capital
Journal, April 26, 2004
·
Washington Post,
April 24, 2004
·
Insight In The News,
May 24, 2004
·
CNNfn,
March 30, 2004
·
Fort Worth
Star-Telegram, February 23, 2004
·
Reuters,
March 4, 2004
December 16, 2004
(excerpt)
SYLVESTER: So why should the average American
care? Because it can hit them right in their pocketbook.
RANDALL DODD, FINANCIAL POLICY FORUM: If foreigners no longer
want to invest in the
SYLVESTER: And it will make it more expensive to finance the government's
growing budget deficit.
(END VIDEOTAPE)
October 14, 2004
(excerpt)
SYLVESTER: But the budget deficit is
not the only concern. Economists are also worried about a growing trade
deficit. The
As Americans have stopped buying
RANDALL DODD, FINANCIAL POLICY FORUM: If we continue along the
pace we are now, it's unsustainable and there will have to be some day of
reckoning.
(END VIDEOTAPE)
October 12, 2004
Banks' derivative use jumps 23% in
Q2
Financial
Policy Forum calls for more regulation of market
By Alistair
Barr, CBS MarketWatch
Last Update: 4:02 PM ET Oct. 12, 2004
Banks used $81 trillion worth of
derivatives in the second quarter, up from $65.8 trillion a year earlier,
according to a report by the Office of Comptroller of the Currency, a
government agency that compiles reports from lenders operating in the
A derivative is a contract that gains its value from other securities. The market for these instruments has boomed: In 1991, there were about $7 trillion worth of contracts outstanding. At $81 trillion, the market now dwarfs equity markets such as the New York Stock Exchange, which lists companies with a market capitalization of less than $12 trillion.
"This market has been growing rapidly for years and the over-the-counter part of it is devoid of regulation," said Randall Dodd, director of the Financial Policy Forum, a Washington, D.C.-based think tank funded by the Ford Foundation.
Ninety percent of outstanding derivatives were traded over the counter in the second quarter, with the remaining 10 percent traded on exchanges, the OCC said.
Dodd, a former economist at the Commodity Futures Trading Commission, thinks there should be rules for posting collateral to back up derivatives trades, like in other markets.
"Interruptions in the collateral chain can spark systemic risks in the financial markets," Dodd warned.
The value of swaps outstanding surged 31 percent to $49.7 trillion in the second quarter from a year earlier, the OCC said. Options use grew 23 percent to $17.6 trillion, while the value of outstanding credit derivatives jumped more than 80 percent to $1.5 trillion, the OCC reported.
The use of futures and forward contracts slid slightly to $12.2 trillion, the OCC added.
While 637 banks operating in the
Those banks retain large credit exposures thanks to their derivatives holdings, the OCC said.
Credit risk exposure as a percent of risk-based capital for J.P. Morgan Chase (JPM: news, chart, profile) remains the highest of any lender at 768 percent, the OCC said. That's down from 890 percent in the first quarter of 2004.
Risk exposure for HSBC (HBC: news, chart, profile), Citigroup (C: news, chart, profile) and Bank of America (BAC: news, chart, profile) stands above 200 percent of their risk-based capital, the OCC added.
September 24, 2004
Potential top-level management shuffle at Fannie Mae
ANCHORS: DAVID BROWN
REPORTERS: AMY SCOTT
DAVID BROWN, anchor:
You know, we could be looking at a top-level management shuffle over at Fannie Mae; this on the heels of a report outlining massive accounting problems at the mortgage finance company. Regulators are calling for some serious housecleaning. In response, Fannie Mae says it's revised its top three officers' contracts to make it easier to drop them. In fact, as MARKETPLACE's Amy Scott tells us, it appears Fannie Mae didn't have much of a choice.
AMY SCOTT reporting:
This week Fannie Mae's board got a
letter from the company's regulator. It read something like this: `You've got a
serious problem in the highest levels of your company, and if you don't fix it,
we will.' Tim Riddiough teaches at the
Mr. TIM RIDDIOUGH (
SCOTT: That safety and soundness are important because, together, Fannie Mae and Freddie Mac own or guarantee three out of every four home loans. Last year Freddie Mac got into trouble for smoothing out its earnings to hide volatility. OFHEO now says Fannie Mae has done the same kind of thing. Randall Dodd with the Financial Policy Forum says more troubling is that in at least one case, executives allegedly inflated earnings to qualify for company bonuses.
Mr. RANDALL DODD (Financial Policy
Forum): That's exactly the kind of activities that we saw with Enron: executive
compensation linked very closely to current earnings. And it provides these
guys with huge incentives to misbehave.
SCOTT: As to whether the top executives
will be fired, neither OFHEO, nor Fannie Mae would comment, saying they're
negotiating the next step. In
BROWN: Fannie Mae is an underwriter of this program.
September 27, 2004
Crossing Over
When regulators become hedge-fund advisers
By
LEAH MCGRATH GOODMAN
ON
THE LAST MONDAY IN AUGUST, Scott Parsons was the Commodity Futures Trading
Commission's chief operating officer. Tuesday, he started work at a hedge-fund
industry group, helping the firms he was charged to regulate a day before.
The
move drew little notice, but serves as the latest flashpoint in the debate over
whether the defection of CFTC officials to organizations once under their
purview is good for the burgeoning
Industry
observers, including former commission officials, are of two minds. But critics
say the pattern reveals a dangerous courtship between the commodities industry
and CFTC officials looking for better-paying jobs.
Such
debate has cropped up before, but has special urgency now. Energy prices are
soaring, and so is participation in
"If you're looking at the job with
an eye toward making more money when you get out, you don't want to get a
reputation for being anti-industry, or they're not going to hire you,"
says Randall Dodd, head of the
Dodd
served as an economic-policy analyst at the CFTC from 1996 to 2000.
The
CFTC is directly responsible for regulating commodities trade on futures
exchanges, but also has the power under the Commodity Exchange Act to bring
charges of wrongdoing against traders in the over-the-counter markets.
Average daily trading volume on the New
York Mercantile Exchange has leapt nearly 20% this year. Notional values
(underlying asset values) of global over-the-counter derivatives, where
The
importance of the CFTC's role may grow, as the
government wrangles with questions of how to beef up its scrutiny of hedge
funds, many of which are heavily invested in commodities. But such
responsibilities also provide good background for industry jobs. "Working
at the CFTC is like getting your training for the major leagues," says
Philip McBride Johnson, CFTC chairman from 1981-1983. "But I haven't seen
anybody prostituting themselves in order to enamor themselves of other
jobs." Johnson left the CFTC to work for
"If
the industry didn't hire us, that would mean it didn't value our talent,"
Parsons said. His new employer, the Managed Funds Association, aims to work
with CFTC and other government officials to ease "excessive
regulation" yet many others say this market is too thinly supervised.
Parsons'
leap came just weeks after a much-debated move by James Newsome -- formerly
CFTC chairman and Parsons' boss -- who in early August became president of the Nymex, the world's largest energy-futures marketplace.
The lure of such posts, and the higher salaries they command, can be irresistible to CFTC civil servants on a government payroll, many say. In his new job at the Nymex, Newsome's salary swelled to around $1 million, nearly seven times what he made at the commission.
In July, the Industrial Energy
Consumers of America wrote a letter to members of Congress, stating: "As
consumers, we not only request but demand that government officials not be
placed in a position of temptation by the prospect of moving quickly into a
high-paying position with the organizations they are to monitor and
regulate." The
Unquestionably, the past year and a half has been a fruitful one for CFTC enforcement actions. In the energy market alone, the agency has levied about $250 million in penalties, mostly for alleged abuses in the over-the-counter markets. But privately, former CFTC officials say that until the 500-strong agency receives more funding, staff and resources, it will continue to sidestep bigger challenges in the industry -- and, by extension, tangling with the financial firms that control it.
LEAH McGRATH GOODMAN is a reporter for Dow Jones Newswires.
September 22, 2004
DOW JONES NEWSWIRES
LEAH
MCGRATH GOODMAN
September 22, 2004 9:29 a.m.
The move drew little notice, but serves
as the latest flashpoint in the debate over whether the defection of CFTC
officials to organizations once under their purview is good for the burgeoning
Industry observers, including former commission officials, are of two minds on the subject. But critics say the pattern reveals a dangerous courtship between the commodities industry and CFTC officials looking for better-paying jobs that blurs the lines of authority.
The debate has cropped up before, but
has special urgency now. Energy prices are soaring, and participation in
"If you're looking at the job with an eye toward making more money when you get out, you don't want to get a reputation for being anti-industry, or they're not going to hire you," said Randall Dodd, head of the Financial Policy Forum, a Washington think tank. "So regulators' behavior is going to be affected even when they're at the commission."
Dodd served as an economic policy analyst at the CFTC from 1996 to 2000.
The CFTC is directly responsible for regulating commodities trade on futures exchanges, but also has the power under the Commodity Exchange Act to bring charges of wrongdoing against traders in the over-the-counter markets. The importance of the CFTC's role may grow, as the government wrangles with questions of how to beef up its scrutiny of hedge funds, many of which are heavily invested in commodities and, CFTC acting Chairwoman Sharon Brown-Hruska says, already registered with the commission.
Those responsibilities provide a good background for industry jobs, former officials say.
"Working at the CFTC is like getting your training for the major leagues," said Philip McBride Johnson, who served as CFTC chairman from 1981 to 1983. "But I haven't seen anybody prostituting themselves in order to enamor themselves of other jobs."
Johnson left the CFTC to work for
"I think the hiring is exciting and beneficial to the CFTC and a signal to everyone that the CFTC is a good training ground," former Chief Operating Officer Parsons said. "If the industry didn't hire us, that would mean it didn't value our talent."
Parsons wasn't sure what his first projects would be at the Managed Funds Association, where he took a job as executive vice president of strategic and government affairs. But the MFA's mission is to work with CFTC and other government officials to ease "excessive regulation" of a market some already say is poorly supervised.
Parsons' leap came just weeks after a much-debated move by James Newsome - formerly CFTC chairman and Parsons' boss - who in early August became president of the New York Mercantile Exchange, the world's largest energy futures marketplace.
The lure of such posts, and the higher salaries they command, can be irresistible to CFTC civil servants on a government payroll, many say.
Newsome's new job at the Nymex saw his salary swell to around $1 million, nearly seven times what he made at the commission. Parsons declined to comment on the details of his compensation.
Just before leaving for the Nymex, Newsome made the case that his move demonstrated the industry's interest in regulatory compliance and working with the government.
"Now, more than ever, relationships between exchanges and government are increasingly important, particularly with the current volatility of energy markets," he said.
But some argued hiring former officials creates the wrong incentives.
"As consumers, we not only request but demand that government officials not be placed in a position of temptation by the prospect of moving quickly into a high-paying position with the organizations they are to monitor and regulate," the Industrial Energy Consumers of America wrote in a letter to members of Congress in July.
The
While CFTC staffers have long left their contracts early as Newsome did to take cushier industry jobs, Newsome's appointment signified the seriousness of the problem, said IECA Executive Director Paul Cicio.
"We don't need increased uncertainty in the market in having to worry about the integrity of enforcement officials," he said. "There's enough uncertainty out there about market manipulation without that."
In the balance is an exploding
Average daily trading volume on the Nymex has leapt nearly 20% this year. Notional values of
global over-the-counter derivatives, where
A handful of former CFTC officials fault the agency's close industry ties for robbing it of the one chance it had to regulate the ballooning over-the-counter derivatives market.
While the CFTC has the power to regulate exchange-based trade, the Commodity Futures Modernization Act of 2000 left the over-the-counter market exempt from its oversight - though subject to its enforcement power.
The legislation effectively freed energy
and metals derivatives from regulation and directly benefited online trading
platforms, sponsored by some of the world's largest financial institutions.
Some critics say those platforms facilitated market manipulation in the months
around the
"The premise of the CFMA seemed to be `the bigger you are, the lighter you fall,"' said former CFTC chairman Johnson. "I kind of have a problem with going along with that."
The potential fallout of another derivatives scandal like the one involving Enron Corp. (ENRNQ) could be devastating, Johnson said.
"I'm not trying to sic the whole government on them, but this needs to be monitored," he said.
The Financial Policy Forum's Dodd, who worked at the CFTC at the time the Commodity Futures Modernization Act was being considered, said the influence of industry heavy-hitters on the commission was enormous. In particular, officials worried the CFTC would lose support from the financial sector and Congress, which approves the agency's budget, if it didn't play along.
"The CFTC failed to make its point, and they caved," he said. "As an organization, it was a big disappointment."
But despite the limits on its authority, the past year and a half has been a fruitful one for CFTC enforcement actions. In the energy market alone, the agency has levied about $250 million in penalties, the bulk of them for alleged abuses in the over-the-counter markets.
Arguably, those violations show the need for greater preventative regulation of over-the-counter markets.
"You can have a philosophical debate over whether it's better to have more oversight or prosecute after the fact," CFTC director of enforcement Gregory Mocek said.
Privately, former CFTC officials say that until the 500-strong agency receives more funding, staff and resources, it will continue to sidestep bigger challenges within the industry - and, by extension, tangling with the financial firms that control it.
"A lot of people think we're talking about a niche market here, but it's not a niche market," Dodd said. "It's every bit as important to our economy as banking and securities."
By Leah McGrath Goodman, Dow Jones Newswires
July 15, 2004
SEC hears proposal that would require
hedge fund managers to register with the government and open their books to
examiners
ANCHORS: CHERYL GLASER
REPORTERS: AMY SCOTT
BODY:
CHERYL GLASER, anchor:
The Securities and Exchange Commission gave the go-ahead yesterday to a
proposal that would require hedge fund managers to register with the government
and open their books to examiners. SEC Chair William Donaldson takes the case
for greater hedge fund regulation to Congress today. MARKETPLACE's
Amy Scott has more.
AMY SCOTT reporting:
First things first. What exactly is a hedge fund?
Mr. RANDALL DODD (Financial Policy Forum): It's like a mutual
fund for the very wealthy.
SCOTT: Randall Dodd directs the Financial Policy Forum. He says
hedge funds use more sophisticated investment tools than mutual funds, like
short selling and derivatives trading. He says more than $800 billion are now
invested in hedge funds with almost no supervision.
Mr. DODD: It's not only wealthy individuals that are moving into the hedge fund
market but also our endowments at our universities, hospitals, our pension
funds, and now people think they're playing a particularly significant role in
the trading volume on Wall Street.
SCOTT: A hedge fund industry group called mandatory registration burdensome and
unnecessary. It plans to lobby against the proposal until the SEC votes on a
final version later this year.
In
July 9, 2004
By Chris Baltimore and Tom Doggett
WASHINGTON,
July 9 (Reuters) - James Newsome, the top U.S. futures regulator who oversaw a
high-profile investigation into bogus energy trading, said Friday he would
resign to head the New York Mercantile Exchange, the world's largest energy
futures market. Newsome, the chairman of
the U.S. Commodity Futures Trading Commission, will leave his post on July 23
and become president of NYMEX on Aug. 2, the exchange said. He would be the first CFTC chairman to leave
and immediately head an exchange regulated by the agency. Newsome, a Republican, has served on the
commission since August 1998 and has been chairman since January 2001. The CFTC regulates the NYMEX, the Chicago
Board of Trade, the Chicago Mercantile Exchange and other
Newsome walks into a controversy between
NYMEX and its arch-rival, Atlanta-based IntercontinentalExchange,
known as ICE, over allegations that ICE improperly uses NYMEX prices to settle
its contracts. NYMEX has long sought a
merger with ICE, which bought NYMEX's
Despite the rules, Newsome's history as a
former regulator could present some ethical dilemmas, experts said. "It's certainly not common practice and
I don't think it's a good practice" for a CFTC head to move quickly into
industry, said Randall Dodd, director of the Financial Policy Forum, a
Washington-based nonprofit research group. "It's kind of a revolving door
that you don't want to see in
PROBED FAKE ENERGY TRADES
As CFTC chairman, Newsome oversaw an
investigation into fake trades reporting by several large
Rumors had circulated for weeks that Newsome was being courted by NYMEX to replace its president, J. Robert Collins Jr., whose contract expired June 30 and was not renewed.
Traders said they were not surprised that the CFTC's top regulator would leave the government to join the industry. "Of course Newsome took the job," said one Texas-based trader. "He's probably getting five times his salary at the CFTC. That's why people work in government." NYMEX is expected to pay Newsome around $1 million, according to one industry source. That would be much higher than his present government pay of about $145,600 a year. An exchange spokeswoman would not comment on Newsome's pay, but Collins had a yearly salary of $1.2 million when he left.
An acting CFTC chairman will be chosen from among the two remaining commissioners, Republicans Walter Lukken and Sharon Brown-Hruska, a CFTC official said. The agency normally has five members, but two seats are open. President George W. Bush must nominate a new chairman, who has to be confirmed by the U.S. Senate.
July 6, 2004
WASHINGTON
-- John Deere & Co., the
It wanted to
own a bank.
In the
spring, John Deere, Target department stores,
Now, as the
fate of industrial banks sits in the hands of a Congress eager for
deregulation, the push to mix banking with unrelated companies has alarmed some
lawmakers and financial officials, who say the mix blurs the line between
commerce and industry and could destabilize the country's financial system.
''It is my
concern that these institutions may not be sufficiently supervised or
regulated," wrote Representative Jim Leach, Republican of Iowa, in a March
request to the General Accounting Office for a review of industrial banks.
While federal
agencies would be able to monitor the standards of lending, they wouldn't be
able to supervise the overall health of the parent company. Opponents like
Leach worry that if the whole corporation went under, it could expose the
federal government to billions of dollars in liability.
Industrial
banks are backed by an alliance of manufacturing companies like John Deere and
retail giants such as Wal-Mart Stores and Target that want credit agencies to
help consumers buy their products. They have won the support of representatives
from the seven states that already allow local versions of the banks:
Opponents,
however, say granting national charters to industrial banks could seed the next
generation of Enron-like financial crises.
''This is a
very dangerous thing," said Randall Dodd, director of the Financial Policy
Forum, a
The current
dispute stems from a 1987 exemption to federal law that allows the seven states
to issue banking charters to nonfinancial companies.
In March, the House of Representatives approved a bill that placed restrictions
on the banks' ability to open branches nationwide while requiring that any
company wishing to own such a bank be primarily financial in nature. That would
exclude corporate giants such as Target and John Deere.
The
restrictions were part of a compromise forged out of concerns that a company
like Wal-Mart could install credit windows in its stores and devastate
community banks the way it has some local retailers.
But the
restrictions have gone nowhere in the Senate, according to some lawmakers,
because Senator Robert Bennett of
Bennett did
not return calls for comment.
''Bennett is
holding it up because he wants to tamper with the compromise," said US
Representative Barney Frank, a Newton Democrat. Frank and Representative Paul
E. Gillmor, Republican of Ohio, worked on the restrictions.
A
spokesperson for John Deere said the company withdrew its bid to open an
industrial bank after concluding that such an operation ''did not fit with our
long-term plans," although some congressional aides say the withdrawal was
in response to the restrictions.
Daryl Rude,
supervisor of industrial banks at
Although
funds invested in industrial banks represent a fraction of the country's total
bank-deposit base, they are growing fast. Since 1995, the deposits owned by nonfinancial companies have grown from $2.9 billion to an
estimated $120 billion today. The owners of the banks range from the auto
manufacturers BMW and Volvo to a firm that finances taxi companies.
Proponents
of the banks say they offer niche products that larger, more diversified
commercial banks have no interest in providing. ''If you look
at what [industrial banks] do" -- loans, credit cards -- ''they don't
compete with community banks, but with other captive banks," said Thomas
Billings, who represents a number of industrial banks as an attorney at Van Cott, Bagley, Cornwall & McCarthy, a Salt Lake City law
firm.
Take EnerBank, a Salt Lake City-based industrial bank that is
owned by CMS Energy, an electrical power company based in
While EnerBank is supervised by state and federal banking
authorities, companies like CMS Energy are not. That's the kind of blind spot,
some lawmakers say, that could prevent regulators from
detecting balance-sheet manipulation. Federal officials, including the FDIC's
inspector general, have suggested such discrepancies may have led to the
collapse last year of Southern Pacific Bank, a
In a letter
to the House of Representatives' Financial Services Committee a year ago,
Federal Reserve Chairman Alan Greenspan made clear his opposition to industrial
banks. In particular, he warned against any move to allowing existing
industrial banks to set up branches nationwide, which would effectively repeal
the separation of commerce and industry as established by the Bank Holding
Company Act of 1956.
''History
demonstrates that financial trouble in one part of a business organization can
spread rapidly to other parts of the organization," Greenspan wrote.
''This is particularly true if the parent holding company has weak financial or
capital resources because the parent may well seek, or be required, to divert
financial resources from a healthy subsidiary to aid either the parent or an
ailing subsidiary."
The FDIC
disagrees.
Its
chairman, Donald Powell, the chief executive officer of the First National Bank
of Armarillo, Texas, before he was brought to
Washington by President Bush, said in March that industrial banks ''can provide
efficient combinations of banking and commerce that deliver results for the
consumer."
George
French, the FDIC's deputy director of supervision, told reporters late last
month that he resented the suggestion that the agency was ill-equipped to
properly supervise industrial banks.
''We find that as something of a slight, to be honest," French said at a press breakfast.
Susan Milligan of
the Globe staff contributed to this report. Stephen J. Glain
can be reached at glain@globe.com
June 29, 2004
By Tom Bemis
Last Updated: 6/29/2004 7:05:40 PM
These poorly
understood financial instruments have been at the center of most of the
financial debacles of the past decade -- Barings,
They've been
called financial "weapons of mass destruction" by no less an
investment sage than Warren Buffett.
Moreover, a
huge portion of these financial transactions exist in a netherworld of little
or no regulation, making them the polar opposite of what is meant by open and
transparent markets.
Yet their use
grows by an estimated 30 percent a year from already stunning levels.
"There's a
reckless way to regulate them and there's a good way to regulate them. And
right now we're definitely on the reckless side," said Randall Dodd,
executive director of the Financial Policy Forum, a think tank in
What troubles
Dodd, among others, is the possibility that one of the major banks or
broker-dealers at the heart of the derivatives trade could run into a problem
that cascades into a full-fledged global financial crisis.
"Those
dealers are central to the market and they're also a central part of our
financial system," Dodd said. "So if some big bank like Citigroup or
Bank of America fails, then the whole payments and settlements system in the
economy is arrested."
Central bankers
take the matter seriously, given the potent mix of conditions: Derivative
instruments have no reporting requirements, and global hedge funds make
abundant use of them. On Monday, Bank of England officials warned that hedge
funds pose a threat to financial stability as they continue to seek higher
yields with enormous amounts of money in play. See related story.
Options
contracts are the most familiar type of derivative because their use is so
widespread. In a classic example, an option can be used to hedge against the
decline in value of an asset can't be sold at the moment -- soy beans or corn
growing in a field, for example.
As interest
rates remained low and debt underwriting jumped, brokerage firms made millions
of dollars selling specialized derivative products to protect debt issuers from
things like swings in interest rates or fluctuating currencies.
In a rising
rate environment, however, at some point underwriting volumes will decline, and
the derivatives business may not be as profitable. See full story.
While so-called
exchange-traded derivatives are well understood, the over-the-counter market
for derivatives exists without any significant oversight or regulation.
It's this
market that has grown so exponentially over the past 15 years. When Bill
Clinton entered office, "the over-the-counter derivatives market was just
$3 trillion," Dodd said. "Today it's $140 trillion," he said.
It's hardly
surprising. Trading in derivatives has proved enormously profitable for many of
the world's largest banks and broker dealers. See related story.
And it's that very profitability that fuels op