The White house wants a lot more money for financial services regulators, as in the SEC and especially the Commodity Futures Trading Commission, or CFTC. The latter would have its budget boosted by 29% to $322 million, while the SEC’s budget would increase by 15% to $1.7 billion. Yes, billion. Why all the extra cash? Essentially, it’s a give back to Wall Street done in December’s cromnibus bill, where some derivatives trading would no longer be pushed out to separate entities that are not covered by the FDIC. In other words, your bank deposit insurance would continue to cover complex high-risk derivatives transactions undertaken by large financial entities. And that means regulators like the CFTC as well as the SEC screaming for more cash to do all that overseeing. The CFTC’s mission statement heroically proclaims that the Commission’s job is “to foster open, transparent, competitive, and financially sound markets, to avoid systemic risk and to protect the market users and their funds, consumers and the public from fraud, manipulation, and abusive practices, related to derivatives and other products that are subject to the Commodity Exchange Act.”

A piece of cake really and that $322 million budget should help. Especially considering, as they themselves state, that the notional value of the swaps market over which the CFTC has oversight is about $400 trillion. But wait, the notional value is not what you need to worry about. You take a tiny percentage of that, say 15% which represents the maximum change in the notional value in response to a big move. In other words, the amount of money you could lose in a worst case scenario. Heck, lower that to 10% and you wind up with a mere $40 trillion risk from swaps alone. We’ll assume that’s worldwide of course, but most swaps are done in US dollars and are thus the purview of the CRTC. So that merely adds up to the combined economies of the USA, China, Japan, Germany, France and the UK. Piece of cake really. You can now sleep easy knowing those extra $72 million that boosted the CFTC’s budget from around $250 million up to $322 million will take care of the problem.

Of course there’s a much much larger pot of money that’s really at stake. It’s called your current and future tax dollars and what Wall Street has done by reversing the push-out of some derivatives to separate entities, is to ensure that should another meltdown around swaps and other derivatives occur, the US government will once again rescue them with as much taxpayer funded bailouts as necessary. There is no question that moral hazard – the lack of consequences for risky behavior and the subsequent increase in risky behavior in response to the lack of consequences – in the financial industry is a huge problem and one that must be solved without taking down everyone’s savings in the process. So Elizabeth Warren was right to protest back in December and it’s not surprise that Obama is asking for more cash for the SEC and the CRTC.

The problem is Warren would have the financial industry so bound up in regulations that it would risk sucking the life and innovation out of the credit markets. How much risk, how much pain Wall Street should endure in order to ensure it does not risk the world financial system again is a tough question to answer. But the trade-off is clear: if you have a freer world where people can bet on swaps and other derivative purely for speculative purposes rather than for hedging future production, then you have to allow the speculators to go down when their bets go wrong. If you have a controlled world where any derivative has to be based on an actual good or service that is to be sold or bought, then you give up some of that freedom and hand it over to the CRTC, the SEC, the IRS, and countless other agencies. Where to balance between these 2 poles is almost impossible to answer, but we have no choice but to try. And to do it in a far more transparent way then the fast one pulled by Congress in December.

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