Derivatives Just "A Sophisticated Form Of Gambling," U.S. Senators Say; Propose Bill Allowing State Gambling Laws To Apply

In describing the complex and little-understood world of derivatives trading as "a sophisticated form of gambling," three U.S. Senators proposed legislation that would enable state gambling regulators and attorneys general to examine the practice.

Senators Maria Cantwell (D-WA), Ron Wyden (D-Ore.) and Bernie Sanders (I-VT) sent out a press release on Tuesday, describing the need for more oversight of the market in derivatives, which are contracts that can act as insurance against a future event, or as just a simple bet.

"The derivatives market has done so much damage to our economy and is nothing more than a very high-stakes casino - except that casinos have to abide by regulations," wrote Cantwell. "Even in Las Vegas at the Blackjack tables, both the House and the player have to have capital behind their bets. But we allow Wall Street to continue to operate in the dark..."

Their bill specifically removes a nine-year-old directive that specifically preempted state law from applying to derivatives contracts. It was part of the Commodity Futures Modernization Act -- the law that essentially allowed for the tremendous growth in the unregulated derivatives market.

The now-$600 trillion market is, for the most part, largely without strong federal regulation. In the wake of last year's near-breakdown of the entire financial system -- brought about in part by derivatives contracts that didn't have sufficient collateral backing them up -- Congress has promised reform. Cantwell, though, has been among the most vocal advocates.

The proposed bill would essentially add another cop to the beat. For those derivatives contracts without federal oversight, rather than derivatives dealers being subject to federal regulations, state regulators would also be empowered to go after those contracts and trades that are unregulated.

One such example can be found in derivatives contracts dealing with foreign exchange. The four major proposals tackling derivatives -- offered by the White House, House Financial Services Committee Chairman Barney Frank (D-Mass.), House Agriculture Committee Chairman Collin Peterson (D-Minn.), and Senate Banking Committee Chairman Chris Dodd (D-Conn.), respectively -- specifically provide an exemption for these types of derivatives contracts whereby two parties exchange agreed-upon amounts of two currencies, either doing this over time or at a later date.

Gary Gensler, the head of the federal agency responsible for regulating derivatives -- the Commodity Futures Trading Commission -- specifically asked Congress to not add in this loophole to the various proposals.

"The concern is that these broad exclusions could enable swap dealers and participants to structure swap transactions to come within these foreign exchange exclusions and thereby avoid regulation," Gensler warned in an August letter to members of Congress. Those who drafted the bills didn't listen.

While the Cantwell-Wyden-Sanders bill doesn't address the lack of federal regulation, it does enable state regulators to provide oversight.

"[Cantwell's] preferred position is a strong federal regulatory environment without loopholes," said her spokesman John Diamond. "This bill establishes a regulatory minimum."

Comments

[we must be aware]

Senator Cantwell is doing a great job I am very happy with her efforts to bring good regulation to control the corrupt bankers.

[Rule Of Law]

We are now to trust Gensler after this track record?

As the Treasury Department’s undersecretary for domestic finance in the last two years of the Clinton administration, Gensler advocated the passage of the Commodity Futures Modernization Act of 2000, which exempted credit default swaps and other derivatives from regulation. The Senate is expected to examine his views on derivatives regulation during the Senate confirmation hearings.[4]

In March 2009, Senator Bernie Sanders (I-VT) attempted to block his nomination to head the Commodity Futures Trading Commission.

A statement from Sanders’ office said that Gensler “had worked with Sen. Phil Gramm and Alan Greenspan to exempt credit default swaps from regulation, which led to the collapse of AIG and has resulted in the largest taxpayer bailout in US history.”

He also accused Gensler of working to deregulate electronic energy trading, which led to the downfall of Enron, and supporting the Gramm-Leach-Bliley Act, which allowed American banks to become “too big to fail.”[5]

[Rule Of Law]

And let's not forget where he comes from--

Gary Gensler spent 18 years at Goldman Sachs, making partner when he was 30, becoming head of the company’s fixed income and currency trading operations in Tokyo by the mid-’90s, and eventually the company’s co-head of finance.[3]

[we must be aware]

This is amazing how Goldman executives have penetrated the goverment.

[pjwrites]

Mafia.

[Tulka2]

Finally. A little plain speaking about derivatives.

A reasoned argument could be made that America began it's decent when the Church began to allow BINGO in the church basement. Ah... it's slippery slope. Pretty soon Wall Street is not even trying to cover up that Capitalism wants to be a game of dice in the alley. Only hard eyed regulators can save the economy.

[Tulka2]

Typo... sorry... should read "America began its descent"

[stevebest]

I wonder if that would weaken state gambling laws and i could play some poker,

[nopilikia]

Sorry as it stands now, only Wall St can gamble in all 50 states.

[Furby2]

Saner words rarely come out of politicians' mouths. It didn't have to be this way. There was a time when the stock market was where good ideas came for capital, hence capitalism. If that were so today, there would be a ton of lenders standing in line waiting for a good idea to show up. Where are those electric cars we should have been driving for the past twenty years? Imagine what that could do for a stock market willing to get off is a$$.

[BillMyers]

I have always advocated that "playing the stock market" is gaming. Unless a business is engaged in raising capital with an IPO, trading securities is a gambling operation; and, a very cleverly controlled one at that.

[BillMyers]

Why doesn't the SEC just allow Stock Exchanges to merge with or convert to casinos?

At least they MAY turn a profit.

Bill Myers Reports 11-10-09

Bill Myers
A Small American Business Owner
VDOAKTV.NET

[hellboundtrain]

Wall Street and government is a marriage of convenience that
allowed everything that has happened,
to happen,
for the plundering of all.

[sposton]

We have allowed a thieving edifice to emerge among us that, if we allow it to exist, will suck the last drop of vitality from this great nation of ours. It is time to properly identify it and kill it in order to save ourselves. If we don't, we are done as a nation of free people. The biggest threat to our national security is not to be found anywhere outside this country - it is our own corporatocracy.

[cholden]

Every state has a regulatory body, usually the state insurance commission. that regulates life insurers as to the amount of liquid reserves they must have to back the life insurance they sell. Regulations vary from state to state, but all states require liquid, cash reserves. Given that there are no federal regulations requiring liquid reserves to back derivative contracts that act as insurance contracts, the state would be a good place to start. Would anybody with an ounce of sense buy a life insurance contract knowing that the seller did not have sufficient reserves to execute the contract?

Let's get this done! We're just one large derivative contract away from another collapse of the house of cards. We are turning a blind eye to the hugh risk that derivative contracts represent to all Americans financial well being.

[oath of fealty]

Stock market surging while main street keeps getting squeezed

good articles: http://financeopinionss.blogspot.com

It looks like 9-8% unemployment is the new normal since the govt. wants ppl to be unemployed

[Kassandra]

I like it!

[HowietheScreamer]

Does this mean in most states they would only be able to trade derivatives on Indain reservations???

[littlepuffycloud]

silly wabbit...

[Furby2]

They'd fixed that problem pretty quick.

[Genep34]

I can't wait for the tea baggers to get involved and come to the rescue of these market wrecking greedy companies. After all - the tea baggers don't want the average hard working american family to be able to fight the greed and corruption of these companies - whether it be banks or insurance or energy.