When I was a kid there was a TV show called The Mod Squad. The detectives on the Mod Squad had long hair and cool clothing. They were different than traditional detectives. The show was extremely popular.
Yesterday, the CFTC announced their answer to the Mod Squad—the Swap Squad. The head of the CFTC, Mr. Gary Gensler, is another former Goldman Sachs employee turned government agency head. Many of these former Goldmanites have been turning up recently in places like Treasury (Robert Rubin and Hank Paulson) or who have run for – and won – political offices such as the phantom of MF Global, John Corzine.[adcode]
Mr. Gensler currently runs the CFTC and is in charge of implementing a piece of legislation that is sure to damage US markets and move business away from our shores—the Dodd-Frank bill. Most people are still not exactly sure what the full impact of this 2,700 page will be, but on thing is for sure: it has accounted for most of the hiring in the financial sector over the past few years. Banks and financial companies have hired teams of compliance people to make sure they comply with the regulation – even though no one entirely understands what it says – and regulatory agencies have hired staff and stuck the taxpayer with the bill in order to enforce this reactive piece of legislation.
Yesterday Gensler’s agency, the CFTC or Commodities Futures Trading Commission, made a big announcement: “The Commodity Futures Trading Commission has recently formed two specialized enforcement ‘squads,’ including a swaps group and another focused on manipulative and disruptive trading practices, the Financial Times reported Monday, citing CFTC director of enforcement David Meister.”
Swaps are financial transactions whereby each party exchanges one thing for another. A swap transaction could exchange gold for dollars or oil for dollars, for example. The beauty of these transactions is that each counterpart takes the others credit. Under Dodd-Frank, the CFTC’s expanded purview includes anything that trades on the US futures exchanges. This means that the CFTC now has additional oversight over these swap transactions. These swap transactions are useful in that producers, consumers, hedge funds, speculators and other market participants use these transactions in order to move large parcels of commodities and transfer price risk in the free market.
The free market has always been a sovereign market, but the Dodd-Frank bill and the CFTC interpretation of the bill do not encourage this. Increased regulation is simply an overreaction to the poor policies that led to the housing crisis and financial meltdown of 2008. The answer – 2,700 pages of Dodd-Frank hooey – is not a very “sovereign” solution, to say the least! Let’s remember folks that it was Congressman Frank and Senator Dodd who both supported the increase in home ownership in the US. This led to the weaker credit restrictions that sowed the seeds for the crisis in 2008 in the first place.
This “Swap Squad” is supposed to swoop down on “manipulative and disruptive” traders. Just like the regulatory agencies did with Bernie Madoff and Enron? Just like they did with Bear Sterns and Lehman? Just like they did with MF Global?
Give me a break.
The enforcement of Dodd-Frank, an inherently flawed piece of legislation, is sure to be nothing more than a public relations stunt for Genlser and the CFTC. It may even quell the ramblings of Senators like Bernie Sanders, the good socialist from Vermont. Sanders has been publicly ranting about higher gasoline prices, and blaming prices at the pump on “speculators.” Are the Iranians the speculators that Comrade Sanders is talking about? Not even close. Senator Sanders is talking about those horrible people who buy oil because they think the price will go higher. What Sanders doesn’t realize is that a speculator buys to sell – speculators simply look for a profit. For each speculator that buys, there is someone else on the other side of the trade who is selling. It is a zero sum game. In fact, speculators add liquidity to markets – they trade when producers and consumers are absent from markets. Speculators grease the wheels of liquid markets, and allow for the operation of markets day in and day out.
Whether the new “Swap Squads” are an answer to the concerns of our elected officials that know absolutely nothing about how markets operate, or another step in the implementation of the Dodd-Frank legislation, one thing is for certain: The increased regulation costs lots of time and money, and increases the size of our ever-growing federal government. We currently have four agencies regulating markets, trying to figure out how to implement this legislation. We have Gensler’s CFTC, and we also have the SEC, the FDIC and FINRA. Four agencies attempting to define one giant piece of legislation that no one really understands! The free market is dying in the US and a sovereign investor should beware!
The Mod Squad was a great TV show in the 60’s and 70’s, but it was fiction. The Swap Squad is reality, and that reality will chase business from the shores of the US. The swap squads are just another example of what reeks of a police state and an invasion of our rights as individuals and business people.
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