Monday, May 3, 2010

Section 106 Means Section 8

If you enjoy simpleminded discussions of complex transactions, you’re probably digging the recent financial reform scuffle. From The Economist:

The most controversial bit is Section 106, which would prohibit entities with access to the Fed’s discount window—ie, banks—from trading swaps or using them to hedge their own exposures.

The rules could drive derivatives to offshore markets, over which they have less control. The Fed would not be thrilled at the prospect of having to rely more on non-American banks as dollar intermediaries in the foreign-exchange-swap market. Pushing swaps into new entities may simply create a new class of firms that are too big to fail.

Yes, Section 106 would nudge these transactions abroad, creating non-American institutions deemed too big to fail. But worry not; helpless U.S. taxpayers will still be used as “emergency lenders,” because the kind of financial concentration these policies would induce will likely mean “systemically important” behemoths even larger than those Americans have already been forced to rescue. What, you thought American money couldn’t be used for international frivolity? Just think back to the ’94 peso crisis. If Section 106 goes into effect, it won’t be long before Americans become sugar daddies for insolvent foreign financiers. Flat world? I’m lovin’ it!

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