Late Friday afternoon, Treasury Secretary Tim Geithner disclosed that he is exempting from the Dodd-Frank transparency requirements on trades of derivatives all derivatives involving foreign exchange. This creates a $4 trillion loophole that will make it easier for large banks to manipulate markets to their own advantage.
The Prospect wrote that Geithner had decided to give the banks this hugely lucrative and risky exemption last month. After our story was picked up by Gretchen Morgensen in The New York Times, prompting a round of criticism, Geithner put the decision on hold. Now he has gone ahead with it.
Abuse of derivatives, such as credit default swaps, was at the heart of the financial collapse. The provisions on derivatives in Dodd-Frank, which were added in Senate floor amendments, were stronger than the language Geithner had originally proposed. The law requires nearly all derivatives to be traded on exchanges or otherwise cleared in a way that prohibits market manipulation and standardizes transactions. This provision takes out some of the abuses -- and some of the unwarranted excess profits -- that were common before the crisis.
But because progressives did not quite have the votes in the Senate to enact loophole-proof legislation, the final Dodd-Frank Act gave the Treasury secretary the authority to exempt derivatives involving trades of foreign currency, if he found this to be in the public interest. Banking lobbyists have been unrelenting in pushing for this exemption.
The original sin of the Obama administration was to fail to change the fundamental business model of the big banks that caused the crash. At the moment when the government had the most reform leverage over the banks that it had bailed out, Obama's top economic advisers failed to use this leverage to require a drastic simplification of an overly large and complex banking system. Instead, the government went right on propping the banks up instead of cleaning them out.
This failure has had both political consequences and economic ones. Politically, it signaled that the administration was in bed with Wall Street, letting Republicans, of all people, articulate popular resentment against the bankers. Economically, the decision enabled the banks to return to grotesque profitability while the rest of the economy stayed in the doldrums.
Both consequences have been bad for America, and President Obama has paid the political price. But Geithner seems to have learned nothing at all.
Ironically, on the very day that Geithner blew this huge hole in Dodd-Frank, European Union regulators opened a sweeping investigation into ongoing abuses in credit default swaps. You have to wonder whether the fact that banks are playing off regulators on opposite sides of the Atlantic is producing a race to the top or to the bottom.
Geithner's decision becomes final in 30 days. For more information on efforts to reverse it, check out Americans for
Financial Reform and Better Markets
.
At the very least, one of the Senate committees still in progressive hands should call Geithner and his critics to testify on this unwise decision and its risky consequences.
