One Safety Net That Needs to Shrink

Following is an excerpt from an article in:


The New York Times
November 04, 2012

One Safety Net That Needs to Shrink

By GRETCHEN MORGENSON

ELECTION Day is upon us, and neither President Obama nor Mitt Romney has really addressed one of the nation’s most pressing economic issues: the risk that one day taxpayers might have to bail out swashbuckling financial institutions again.

Granted, the economic pain many are feeling now — the snail’s pace recovery, the stubbornly high unemployment — is foremost in voters’ minds. But given all we’ve gone through after the last binge in the financial industry, failing to confront the too-big-to-fail question is a serious oversight.

Many Americans probably think the Dodd-Frank financial reform law will protect taxpayers from future bailouts. Wrong. In fact, Dodd-Frank actually widened the federal safety net for big institutions. Under that law, eight more giants were granted the right to tap the Federal Reserve for funding when the next crisis hits. At the same time, those eight may avoid Dodd-Frank measures that govern how we’re supposed to wind down institutions that get into trouble.

In other words, these lucky eight got the best of both worlds: access to the Fed’s money and no penalty for failure.

Which institutions hit this jackpot? Clearinghouses. These are large, powerful institutions that clear or settle options, bond and derivatives trades. They include the Chicago Mercantile Exchange, the Intercontinental Exchange and the Options Clearing Corporation. All were designated as systemically important financial market utilities under Title VIII of Dodd-Frank. People often refer to these institutions as utilities, but that’s not quite right. Many of these enterprises run lucrative businesses, have shareholders and reward their executives handsomely. Last year, the CME Group, the parent company of the Chicago Mercantile Exchange, generated almost $3.3 billion in revenue. Its chief executive, Craig S. Donohue, received $3.9 million in compensation and held an additional $10 million worth of equity awards outstanding, according to the company’s proxy statement.

Make no mistake: these institutions are stretching the federal safety net. The Chicago Merc clears derivatives contracts with a notional value in the trillions of dollars. I.C.E. clears most of the credit default swaps in the United States — billions of dollars a day, on paper. No wonder they are considered major players in our financial system.

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