In a statment before the Senate Committee on Banking, Housing and Urban Affairs Subcommittee on Securities, Insurance, and Investment, Christopher Whalen, an analyst from New York, delivered the following testimony (excerpts, full version here, emphasis added):
Perhaps the most important issue for the Committee to understand is that the structure of the OTC dervivatives market today is a function of the flaws in the business models of the largest dealer banks, including JPMorgan Chase (NYSE:JPM), Bank of America (NYSE:BAC) and Goldman Sachs (NYSE:GS). These flaws are structural, have been many decades in the making, and have been concealed from the Congress by the Fed and other financial regulators.
Simply stated, the supra-normal returns paid to the dealers in the closed OTC derivaties market are effectively a tax on other participants, especially investors who trade on open, public exchanges and markets. The deliberate inefficiency of the OTC derivatives market results in a dedicated tax or subsidy meant to benefit one class of financial institutions, namely the largest OTC dealer banks, at the expense of other market participants. Every investor in the global markets pay the OTC tax via wider bid-offer spreads for OTC derivatives contracts thatn would apply on an organized exchange.
The taxpayer in the industrial nations also pay a tax trough periodic losses to the system caused by the failure of the victims of OTC derivatives and complex structured assets such as AIGs and Citigroup (NYSE:C). And most important, the regulators who are supposed to protect the taxpayer from the osts of cleaning up these periodic loss events are so captive by the very industry they are charged by law to regulate as to be entirely ieffective. As the Committee proceeds in its deliberations about reforming OTC derivatives, the views of the existing financial regulatory agencies and particularly the Federal Reserve Board and Treasury, should get no consideration from the Committee since the views of these agencies are largely duplicative of the views of JPM and the large OTC dealers.
See market-ticker for more on that story.
In addition, it was claimed today by House Republicans that the Fed deliberately withheld information from other regulators to push the Bank of America-Merril Lynch merger through. See here.
I have been writing just recently that the securitization process was, in my view, inherently geared towards the benefit of a few, and was in effect constituting a money laundering device to rip unsuspecting people off in and funnel the money off to other people’s bank accounts.
I am, obviously, not alone in thinking this way.
It comes as no surprise than, that the banks are doing all they can to block effective regulation of these OTC markets – they have been doing that for decades.