Tuesday, November 6, 2012

Dodd-Frank's Financial Outsourcing

New rules push business offshore, while taxpayer risk stays home.

President Obama likes to describe a mythical corporate tax deduction for moving jobs overseas. But a real-life Obama policy is already encouraging financial transactions to occur outside America. Two big international banks now say they won't participate in the U.S. swaps market. This follows an October letter from foreign regulators warning Commodity Futures Trading Commission Chairman Gary Gensler not to blow up the global derivatives marketplace.

Singapore's DBS and Sweden's Nordea Bank NDA.SK +2.18% recently announced that they won't register in the U.S. to trade swaps. These are contracts in which two parties exchange risks, for example, by trading a fixed interest rate for a floating one. DBS doesn't see the "immediate commercial benefits" of making the investment necessary to comply with new U.S. rules, said Tse Chiong Thio, managing director of DBS Bank.
Since Mr. Obama signed the Dodd-Frank financial bill in 2010, Washington has embarked on a rule-making frenzy, and Asia is looking better all the time. "Regional markets are substantially more important to us, and we are working with regulators who are developing a framework across this region," Mr. Thio said at a meeting of the International Swaps and Derivatives Association in Singapore.
The CFTC's Mr. Gensler dismissed the news from DBS and Nordea by saying, "Our goal was to get the largest banks in the swaps business and I don't think either of those banks were." For the record, each one is the largest bank in its home country.
They may not be huge players in swaps, but is it Mr. Gensler's job to push companies he regards as minor leaguers out of the U.S. market? With freer markets overseas, newer firms may someday grow larger than even the likes of Goldman Sachs GS +1.76% .
Meanwhile, other regulators are worried that Mr. Gensler's new rules on everything from trade execution to price reporting to customer disclosures will often conflict with foreign regulations. In last month's letter to Mr. Gensler, top financial regulators from the European Commission, France, Japan and the U.K. asked him to take a deep breath before imposing burdens that could disrupt international markets. The regulators wrote that "we would urge you before finalising any rules or enforcing any deadlines to take the time to ensure that US rulemaking works not just domestically but also globally."
The irony here is striking and not only because Mr. Obama so often contrasts his foreign policy with a unilateralist caricature of George W. Bush. One of the principal arguments for enacting Dodd-Frank in haste in 2010 was that the world was moving toward similar rules and the U.S. needed to go along. In a hurry to exploit ebbing Democratic control of Congress, co-authors Barney Frank and Chris Dodd pulled a legislative all-nighter to write the final draft.
Some Americans may not mind this global financial flight, having bought the Democratic history of the financial crisis that ignores the housing meltdown and blames the financial instruments that reflected it. Others may conclude that big derivatives books at banks scare regulators into rescuing them when they fail, and therefore a smaller market is a taxpayer protection.
But while pushing more derivatives business into foreign jurisdictions, Dodd-Frank is simultaneously raising taxpayer exposure to this market. In July, the Obama Administration formally inducted eight firms into the too-big-to-fail club, including several clearinghouses that stand behind derivatives trades. Now officially designated as "Financial Market Utilities" that are "systemically important," these organizations will enjoy emergency access to the Federal Reserve's discount window.
Taxpayers will no doubt be thrilled to learn that along with too-big-to-fail banks like Citigroup C +2.81% and Bank of America, BAC +1.44% they are also now standing behind Wall Street trading at companies they've never heard of, like CLS Bank International and the Options Clearing Corporation. And while we're on the subject, can someone explain how the world would come to an end if ICE Clear Credit or even the much larger CME went bankrupt?
Mr. Obama's financial regulation is producing an amazing trifecta: anger among our international trading partners, a less prosperous financial market at home, and a larger taxpayer safety net. We'd call this more evidence of the law of unintended consequences, except this may be exactly what Dodd-Frank's authors intended.

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