One of my readers wrote to Senator Cantwell, ((D) Washington State), about the concerns my reader has about the financial area, particularly after reading Shelley Stark’s Hidden Treuhand book. This is the response Senator Cantwell sent to her that she sent to me to post for the interest of other readers. -GFS
From: Maria_Cantwell@cantwell.senate.gov [mailto:Maria_Cantwell@cantwell.senate.gov]
Sent: Thursday, January 21, 2010 10:32 AM
Subject: From the Office of Senator Cantwell
Thank you for contacting me to express your concerns about the need for regulatory reform of the country’s financial markets. I appreciate hearing from you on this important matter, and I sincerely regret the delayed response.
The recent crisis in our housing and financial markets has shaken the confidence of the American people. I recognize the tremendous burden that Washington families and businesses have faced in recent months and I remained concerned about the lack of transparency and oversight in U.S. financial markets. Like you, I am concerned about the stability of our country’s financial markets and believe that regulatory reform is necessary. Reckless subprime mortgage lending resulted in people being kicked out of their homes, hurt small banks, and nearly collapsed large too-big-to-fail banks. Businesses are failing and laying workers off because they cannot access the credit they need. Community banks are not lending and prospective borrowers are left with few or no options. It is clear that one of the primary causes of the economic meltdown was the opaque nature of the unregulated derivatives market.
Derivatives are a complex financial tool that, when adequately regulated, can be used to manage commercial risk. For instance, electric utilities and airlines purchase derivatives to hedge against potential future price increases of natural gas or jet fuel. Corporations can purchase interest-rate derivatives to hedge against fluctuations in interest rates that can increase input costs. However, derivatives were also being used by speculators and big banks to make off-book bets on everything from home prices to foreclosure rates, energy prices, and even food prices. Trillions of dollars worth of unregulated derivatives tied to credit markets and complex financial mortgage-based instruments fueled the crisis.
Prior to 2000, no federal law exempted derivatives from being traded on safe, transparent regulated central exchanges overseen by the Commodity Futures Trading Commission (CFTC). This oversight protected the public from the inherent risk posed by derivatives and from the chaos that could result from unscrupulous or reckless trading. However, in 2000, major financial firms sought and received an exemption from all regulation of a massive class of derivatives, including preemption from state gambling laws.
The lack of any regulations at the federal level meant that, in effect, the 2000 law changes enabled rampant derivatives speculation that culminated in the economic collapse of 2008. In 2000, when the deregulation law passed, the derivatives market was already $94 trillion. After deregulation, the derivatives market ballooned to over $598 trillion by 2008. Major Wall Street firms grew too big to fail because they were making massive bets on unregulated derivatives with no capital to back up those bets. When these bets didn’t pay up, it was up to American taxpayers to provide the capital to bail them out. We cannot allow this to happen again.
That is why I am fighting to ensure that we have the strongest possible reforms over our financial markets. Last year, I worked with the Administration on proposing strong regulatory controls on these markets, including requiring transparency in derivatives trading and restricting market manipulation. After numerous conversations with the administration, I was pleased when they announced support for some of the proposals I had called for, including clear support for bringing the unregulated derivatives market under full regulation and oversight.
On September 17, 2009, I introduced the Derivatives Market Manipulation Prevention Act of 2009 (S. 1682), which would make it easier for the CFTC to prevent, deter, and enforce cases of market manipulation in derivatives. Current law makes it very difficult for the CFTC to effectively meet its mandate to enforce and deter market manipulation. This is because current law requires the CFTC to meet a more rigorous standard to prove market manipulation than other financial market regulatory agencies such as the Securities and Exchange Commission (SEC), the Federal Energy Regulatory Commission (FERC), and the Federal Trade Commission (FTC). My bill would establish a bright line so that the CFTC can effectively enforce and deter market manipulation in commodity futures and derivatives markets.
On November 10, 2009 I introduced S. 2763, a bill to repeal the state gambling law preemption on unregulated derivatives. My bill would empower state gambling regulators and attorney generals to examine unregulated derivatives trading and take appropriate action to protect citizens from practices which can harm the foundations of our economy. As Congress considers comprehensive legislation to close loopholes and exemptions from federal derivatives regulation, states should no longer be prohibited from also protecting their citizens.
I will be working with my colleagues to ensure Congress passes the strongest financial market reform bill possible. We must ensure that large financial firms serve as a force to create jobs and facilitate entrepreneurship, and prevent reckless use of unregulated financial products that can bring down the entire financial system.
Please be assured that I will continue my efforts in the U.S. Senate to bring transparency to government and to the financial markets by fighting for smart, effective regulation and oversight so we do not face a catastrophe like this again.
Thank you again for contacting me to share your thoughts on this matter. You may also be interested in signing up for periodic updates for Washington State residents. If you are interested in subscribing to this update, please visit my website at http://cantwell.senate.gov. Please do not hesitate to contact me in the future if I can be of further assistance.
United States Senator
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