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Committee on Banking, Housing and Urban Affairs : Statement by Christopher Whalen; United States Senate; June 22, 2009

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The Congress should admit that it made a mistake in 2000 by blocking CFTC regulation of OTC derivatives. The Congress should take the time to document how and why Greenspan, Rubin and Summers, and others, viciously attacked the reputation and integrity of Chairman Born and other members of the CFTC, and thereby blocked CFTC regulation of OTC derivatives. The actions of Summers, Greenspan and Rubin over a decade ago to block CFTC regulation of OTC derivatives arguably created the circumstances for the collapse of AIG as well as hundreds and hundreds of billions of dollars in losses incurred by financial institutions around the world. The Congress and the people of the United States deserve to hear the explanation of Summers, Greenspan and Rubin for the actions they took and did not take in their capacity as public officials subject to congressional oversight.

I agree with the statement by Secretary Geithner last week that how and whether to combine the operations of the CFTC and the SEC is a question that needs more time and consideration than the Obama Administration has allocated for the consideration of reform for the OTC markets in 2009. I urge the Congress to move first on subjecting the OTC markets to CEA, then to take further time for hearings and fact finding to consider what other changes should occur in terms of the law and the operational structure of the SEC and CFTC.

2) As the Congress weighs proposals to move more over-the-counter derivatives transactions to central counterparties or exchanges, what key decisions need to be considered?

It is important for the Committee to understand that the reform proposal from the Obama Administration regarding OTC derivatives is a canard; an attempt by the White House and the Treasury Department to leave in place the de facto monopoly over the OTC markets by the largest dealer banks led by JPM, GS and other institutions. For example, the centralized clearing model proposed by the Treasury has some notable attributes, but still leaves the OTC markets under the complete control of the dealer banks, with little public disclosure of prices, no transparency and no accountability to other dealers and market participants. The proposal, for example, to require centralized clearing still does not address the issues of pricing, basis risk and transparency that I have raised in my comments.

Why then are the large banks, led by JPM, engaged in such a desperate battle over the reform of the OTC derivatives markets? For the world's largest banks, the OTC derivatives markets are the last remaining source of supra-normal profits -- and also perhaps the single largest source of systemic risk in the global financial markets. Without OTC derivatives, Bear Stearns, Lehman Brothers and AIG would never have failed, but without the excessive rents earned by JPM, GS and the remaining legacy OTC dealers, the largest banks cannot survive and must shrink dramatically.

No matter how good an operator of commercial banks JPM CEO Jamie Dimon may be, his bank is doomed without its near-monopoly in OTC derivatives -- yet that same OTC business must eventually destroy JPM and the other large dealers. Seen from that perspective, the rescues of Bear Stearns and AIG were meant to protect not investors nor the global markets, but rather to protect JPM, GS and the small group of dealers who benefit from the continuance of their monopoly over the OTC derivatives market.

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