Target: Senate Majority and Minority Leaders Harry Reid and Mitch McConnell, Speaker of the House John Boehner and House Minority Leader Nancy Pelosi
Goal: Make the financial sector more stable by regulating currency trades in an open market.
The 2008 financial crisis occurred in part because banks began to refuse to lend to one another, out of fear that they would not be able to pay their debts. One especially important kind of bet in which banks were engaging is called a derivative. It is essentially a bet where the outcome hinges on, or is derived from, the value of something else. The Dodd-Frank Wall Street Reform Act was created to address many of these risky derivatives bets that necessitated the intervention of government to prevent financial chaos. However, a provision in the bill allowed the Treasury Secretary to remove currency derivatives to be exempted from the regulation that addresses all other derivatives, if he decided to exercise that right. Treasury Secretary Timothy Geithner has chosen to do so.
Secretary Geithner essentially argued that currency trades are different from other derivatives and their markets have been able to successfully self-regulate. However, this flies in the face of what is known about currency trades. An audit of the Federal Reserve conducted by the Government Accountability Office revealed that $5.4 trillion in loans had been made by the Federal Reserve to prevent the currency market from collapsing. Other statistics demonstrate just how widespread currency trades are. The Comptroller of the Currency indicated that currency trades accounted for about 38% of bank profits for the first three quarters of 2010. Additionally, the nation?s five largest banks control 97% of the currency trading market, making that market highly concentrated. That is to say, the nation?s largest banks control the vast majority of currency trades and make large profits from those trades.
Simply put, without transparency to the seller, the buyer, and regulators, derivatives trades are susceptible to manipulation. For example, a bank could arrange a currency trade with its customer in which the bank uses the day?s most favorable rate for the currency it is acquiring while using the day?s least favorable rate for the currency its customer is acquiring. Another form of potential manipulation would be for banks and other traders to essentially disguise non-currency derivatives trades by including them in currency trades, thereby evading regulation.
The overall picture is clear. Currency trades are a huge part of bank profits and nearly all of them are controlled by the nation?s five largest banks. The currency market required a bailout following the 2008 financial crisis and without transparency, it could require one again. Therefore we must urge Congress to amend the Dodd-Frank Act to include currency trades in with all other derivatives subject to regulation and transparency.
PETITION LETTER:
Dear Senate Majority and Minority Leaders Harry Reid and Mitch McConnell, Speaker of the House John Boehner and House Minority Leader Nancy Pelosi,
The 2008 financial crisis showed us how troubled the derivatives market was, and the kind of instability and manipulation that took place within it. Many of those problems were addressed by the Dodd-Frank Wall Street Reform legislation that regulates derivatives on open markets.
However, the act also allowed the Treasury Secretary to exempt currency trades from this kind of regulation, and he has chosen to make that exemption. Given that currency trades accounted for about 38% of bank profits in the first three quarters of 2010, and that the nation?s five largest banks control 97% of the currency trading market, it is clear currency trades are a big deal. Furthermore, the currency trading market was in so much trouble following the 2008 crisis that the Federal Reserve supplied $5.4 trillion in loans to prop it up.
Currency trades are an important financial instrument and without regulation and transparency, they continue to pose great risk to the stability of the financial sector. That is why I urge you to amend the Dodd-Frank legislation to require currency trades to be treated like all other derivatives, and to prevent the Treasury Secretary from exempting them.
Sincerely,
[Your Name Here]
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