Legal Briefing: Reformers Push Hard to Regulate Derivatives
Financial Reform Lobbying Wars: The Battle Over Derivatives
Though recently not in the spotlight, one of the biggest battles in financial regulatory reform is whether derivative trades will move out of the shadows into a public exchange. Derivatives played a major role in the financial system's collapse, but because private, black-box trades are highly profitable, the five firms that dominate the derivatives trade -- Goldman Sachs (GS), JP Morgan Chase (JPM), Bank of America (BAC), Morgan Stanley (MS) and Citigroup (C) -- are fighting hard to prevent the trades from being put on an exchange.
Reformers, however, are equally adamant about getting derivatives into a regulated market because exchange trades are far more stable and less dangerous to the economy. If one trader can't make good on its bets (for example, AIG) the exchange, backed by multiple firms, steps up and completes the trades. One of the trickier challenges has been developing a mechanism to separate speculators from ordinary business-risk hedgers, since exchange trades are more expensive than private ones.
Generally speaking, the congressional Democrats and President Obama have fought for exchange trades, while the banks and most GOP legislators have fought to block a public exchange. One of the more unusual advocates for derivatives reform has been Gary Gensler, head of the Commodity Futures Trade Commission and a 30-year veteran of Goldman. Gensler is unusual not only because, like Joseph P. Kennedy, he really knows how the system he's regulating works, but also because the typical pattern is to switch from being a regulator to being a bank lobbyist.
The New York Times reports that, as of now, reformers are winning: The Democrats will introduce a bill "requiring nearly all users of derivative contracts to trade on centralized exchanges and possibly ordering banks to segregate their business in derivatives into separate subsidiaries." Still, the bill's introduction would just mark the start of a new battle in the lobbying wars. Reformers can't be sure derivatives will come out of the shadows until a bill reaches President Obama's desk.
Banks Vow to Keep Bailout Secrets Secret
Financial news company Bloomberg sued the Federal Reserve for details of the bank bailout, winning its case in both the District Court and Second Circuit Court of Appeals. But while the Fed released some of the details being sought, a lot remains hidden. Now Bloomberg reports that the banks which joined the suit on the pro-secrecy side have vowed to take the case to the U.S. Supreme Court. What are they trying to hide? Mostly who got what help when, and under what terms, information that would be very helpful in accurately assessing the banks' health.
And in the Business of Law...
• Stroock, Stroock and Lavan owes one client millions of dollars because documents it wrote said "2008" when it should have said "2009", reports Above the Law.
• Reed Smith adds 10 lawyers in Paris and Munich, reports ABA Journal.
• An ex-Arthur Anderson attorney has rebuilt her career, reports ABA Journal.
• The DOJ's successful head of Foreign Corrupt Practices Act prosecutions is leaving for private practice, reports the Blog of The Legal Times. Presumably, he'll start representing companies facing FCPA charges.