Wall Street looks to be quietly making gains in its attempt to keep regulatory interference to a minimum in a $30 trillion derivatives market at the heart of the financial crisis. The fact that I haven't even mentioned the name of the market yet speaks to one of the main reasons Wall Street is winning: it is benefitting from the fact that Main Streeters and their representatives in Congress are too bored by the topic to do anything about it. Credit default swaps, or CDS -- there, I said it -- are a really geeky business. They are essentially promises by one party to pay another, if some third party should fail to pay its debts. CDS have gotten some mainstream attention, including a 60 Minutes report last year, but masses of people are never going to be calling up the representatives in Congress telling them to ban credit default swaps. AIG ( AIG) bonuses are much easier to get riled up about. Never mind that the reason people are riled up about AIG bonuses is because AIG had to be bailed out -- because it wrote too many credit default swaps to companies like Goldman Sachs ( GS). Some regulatory proposals are circulating. House Agriculture Chairman Rep. Collin Peterson (D., Minn.) and his counterpart in the Senate, Tom Harkin (D.,Iowa) have each put forward plans to bring some order and accountability to this market. Wall Street prefers the House version, which of course is less restrictive.
But neither version appears to address concerns raised by people including left-wing hedge fund genius George Soros that buyers of credit default swaps should have to be required to own the debt they are insuring against. Otherwise, Soros and others argue, it is too easy for market manipulators to create a panic around a company that can become a self-fulfilling prophecy. There is also the question of whether this legislation will ever go anywhere. Willa Cohen Bruckner, a partner at law firm Alston + Bird, believes regulators and Congress will get to it eventually, but are too worried at the moment about fixing banks and getting the economy moving again. "Until they get the economy going again, nothing else really matters," she says, in explaining why CDS regulation was pushed to the back burner. In the meantime, the derivatives industry, which includes large banks like JPMorgan Chase ( JPM), Morgan Stanley ( MS), Deutsche Bank ( DB) and Credit Suisse ( CS) has finally delivered on long-promised measures to bring some semblance of standardization and transparency to CDS trading. Earlier this month, derivatives trading firms created a committee that will decide how certain contracts are settled, rather than leaving it up to the two parties involved to decide. Wall Street ingeniously called this initiative the "Big Bang," in order to make it sound like they were actually doing something important. Reporters, with our natural tendency to make everything we are writing about sound like a Really Big Deal, readily bought into this propaganda. But the "Big Bang," is not big. It covers only a small part of the market, and it is not mandatory.
Michael Greenberger, professor at the University of Maryland school of law and a former derivatives regulator, says off-exchange derivatives users have promised and failed to regulate themselves repeatedly since at least 1999, when the failure of hedge fund Long-Term Capital Management roiled the markets. "They've repeatedly said 'We'll fix this. We know it's a problem.' But it has proven not to work. There can't just be self-regulation," he says. As the near-collapse of AIG recedes into the past, however, and as long as there is not another blow-up, the status quo is likely to prevail. "It depends on whether we're coming out of this problem or if we're in a bear market rally," Greenberger says. "If we're coming out of this problem, the way politics works, the arguments for limiting regulation will prevail. If this is a bear market rally and we're going to experience more dislocations in the next few months, Congress will be in no mood to accept excuses."