Warren Buffett famously called derivatives financial weapons of mass destruction. That was before they detonated, propelling the financial system toward the brink of collapse. Then, as part of the Dodd-Frank law meant to prevent future crises, Congress last year demanded a new system of regulation for the financial instruments. Washington Post. Where is Mr. Dodd? Mr. Frank, could you explain please?
Now the The Wall Street Journal has an editorial on the new bailout powers from Dodd-Frank:
Only seven months too late, official Washington is starting to acknowledge flaws in the architecture of the Dodd-Frank law passed last July. Tuesday, for example, Federal Reserve Governor Daniel Tarullo admitted in testimony to the House Committee on Financial Services that by forcing much of the derivatives market through central counterparties, the government would now be creating new too-big-to-fail institutions and new potential sources of systemic financial risk.
Somehow this wasn’t one of President Obama’s talking points last year, but yesterday Mr. Tarullo said the government would have to watch these new entities very closely: “This heightened oversight is important because financial market utilities such as central counterparties concentrate risk and thus have the potential to transmit shocks throughout the financial markets.” Oh, and because these “utilities” are backed by the government, taxpayers will end up paying if they fail.The Fed Governor added that the Federal Reserve Board “also was given new authority to provide emergency collateralized liquidity in unusual and exigent circumstances to systemically important financial market utilities. We are carefully considering ways to implement this provision in a manner that protects taxpayers and limits any rise in moral hazard.”What this means is the Chicago Mercantile Exchange can take huge risks and know the Federal Reserve will bail them out.