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Tuesday, December 14, 2010

Tax Cuts and Republican Tweets

 FY 2011 Omnibus Appropriations Act Full Text 

 Here's a link to the Senate Democrats' proposed 2,000-paged omnibus spending bill...


 Sen McCain tweets
Appropriators announced a $1.1 trillion omnibus spending bill full of outrageous/wasteful earmarks – what a disgrace!
I filed my amendment today to eliminate all funding for earmarks in the omnibus spending bill.
Heading 2 the floor 2 talk about the $1.1 Trillion 1924 page omnibus spending bill that includes 6488 earmarks totaling nearly $8.3 billion
Stand by for the top 10 pork barrel projects from the 1,924 page, $1.1 trillion omnibus spending bill
#10. $247,000 – Virus free wine grapes in Washington State
#9. $413,000 – Peanut research in Alabama
#8. $125,000 for fishery equipment for the Guam Fishermen’s Cooperative Association, Hagatna, Guam.
#7. $349,000 – Swine waste management in North Carolina
#6. $400,000 for solar parking canopies and plug-in electric stations in Kansas
#5. $165,000 for maple syrup research in Vermont
#4. $522,000 for cranberry and blueberry disease and breeding in New Jersey
#3. $246,000 for bovine tuberculosis in Michigan and Minnesota
#2. $235,000 for noxious weed management in Nevada
And the #1 pork barrel project in the omnibus spending bill...so far is...
#1. $300,000 for the Polynesian Voyaging Society in Hawaii

Sen. DeMint:Tweets
Ignoring the Nov. elections, Democrats just introduced a $1.1 trillion omnibus spending bill stuffed with thousands of earmarks.
Dems want to ram through the 1,924 page spending bill before Christmas, but I'll join w/ other GOP to make them read it on the Senate floor.
According to @Senate_RPC, omnibus spending bill contains over $1 billion to implement the unconstitutional Obamacare law


Senate GOP Comes Out Swinging Against Omnibus

Senate Minority Leader Mitch McConnell (R-Ky.) denounced Democrats’ sweeping one-year omnibus spending bill introduced Tuesday, saying he will “vigorously oppose” it despite the inclusion of millions in earmarks he had requested.

Senator Reid is apparently going repeat what he did last Christmas: jam through a 2000 page bill that no one has had time to read, debate, or offer amendments on, which costs $1.2 trillion! Worked so well with HC bill.

Who the Heck Does She think She Really Is??????


Governor Jan Brewer Wishing you and your family a “Rosie” Christmas -- One that glows with warm blessings of the season, and a “We Can Do It” spirit throughout the New Year!

Hans Rosling's 200 Countries, 200 Years, 4 Minutes - The Joy of Stats - BBC Four




More about this programme: http://www.bbc.co.uk/programmes/b00wgq0l
Hans Rosling's famous lectures combine enormous quantities of public data with a sport's commentator's style to reveal the story of the world's past, present and future development. Now he explores stats in a way he has never done before - using augmented reality animation. In this spectacular section of 'The Joy of Stats' he tells the story of the world in 200 countries over 200 years using 120,000 numbers - in just four minutes. Plotting life expectancy against income for every country since 1810, Hans shows how the world we live in is radically different from the world most of us imagine.

Medicare: Is there a doctor in the house?


The Atlanta Journal-Constitution
5:50 p.m. Monday, December 13, 2010
 Dr. Susan Margletta, a family physician with a practice in Norcross, consults with patient Ted Poolos. Margletta said significant cuts in Medicare payments to doctors could lead her to stop accepting business from Medicare patients.
Dr. Susan Margletta, a family physician with a practice in Norcross, consults with patient Ted Poolos. Margletta said significant cuts in Medicare payments to doctors could lead her to stop accepting business from Medicare patients.


Barry Reid knows what it's like to be dropped by a doctor.
About two years ago, the 71-year-old retired state employee from Tucker got a letter from the specialist who managed his diabetes care saying he would no longer accept Medicare.
"I felt, frankly, like a second-class medical care recipient," Reid said.
Reid's experience is becoming more common these days, as doctors grow weary of an unstable system for setting Medicare's payments. "I was probably at the front of what is coming down the road for a lot of people," he said.
Congress avoided an exodus of doctors from the Medicare program last week when it pushed back a 25 percent cut in physician payments that was set for January. But doctors will face an even larger cut in payments this time next year unless Congress redesigns the dysfunctional system that adjusts Medicare rates.
That system has developed a bizarre pattern in recent years: The law calls for a reduction in reimbursement rates; doctors complain; Congress acts to stall the reduction, over and over again. This year alone, doctors faced a major Medicare cut five times, and five times Congress voted to delay the cut to a later date.
The instability of the system has already prompted some doctors to leave Medicare and has more thinking about it, just as the first wave of the gigantic baby boom generation begins to engulf the program. Without a fix, experts said, more elderly Americans will have a hard time getting an appointment with the doctor of their choice.
"Medicare is a mess right now," said Dr. Thomas Bat, who practices with a group of physicians at North Atlanta Primary Care.
The practice planned to stop taking new Medicare patients if the 25 percent cut went through, Bat said. It is also considering an option that would ask patients to pay for office visits up front, and then get reimbursed by Medicare. Bat said that would at least help the office address the delays in Medicare payments, which he said can stretch for weeks every time a scheduled cut is delayed by Congress.
Bat said his practice loses between $4 and $6 on office visits with people covered by Medicare. But with enough privately insured patients in the mix, the office can stay afloat as long as it works efficiently, he said.
Some specialty groups have already dropped Medicare, Bat said, something he said he is not willing to do at this point.
"When the day comes that we tell patients no -- that is the day we will all regret, that is the day we don't want to see coming," he said.
Flawed formula
Each year, a formula known as the "sustainable growth rate" calculates the payments the system can absorb. If costs exceed a target for total spending, the system simply adjusts payments downward to meet the target. Ever since the formula triggered a 4.8 percent cut in doctors' pay rates in 2002, Congress has put off all other reductions in physician payments ordered by the formula.
Every time it comes up,  doctors say they simply couldn't stay in business if Medicare reduced its payments -- especially a cut that would lop off one-fourth of what the doctors get now. Most say they already lose money on Medicare patients, even at current rates.
Medicare pays about 80 percent of what private insurance pays, according to government reports. Currently, physicians in Atlanta get $67 for a typical office visit for a Medicare patient.
While Medicare payments for doctors have remained nearly flat for the past decade, the cost of running a medical practice has gone up by more than 20 percent, according to estimates by the American Medical Association.
Survey data collected by the Medicare Payment Advisory Commission indicates that most Americans on Medicare are not have a problem getting doctor's appointments or finding new doctors. But the American Medical Association says that about one in five physicians have limited the number of Medicare patients in their practices because of the program's low payments and the threats that reimbursements would drop even lower.
Reid, the retired state employee, said he found another specialist to treat his diabetes after being dropped. He said he is happy with his new doctor, but is concerned about how long that relationship will last.
"The problem is, he is almost my age," said Reid, who is 71. "I know within a year or two, I'm going to be doctor shopping again and trying to find another physician to give me care for this chronic illness."
Expensive fix
Republicans and Democrats agree that a permanent fix is needed to give doctors the stability to run their practices. "How can they plan for capital investment, for hiring, for whatever, if there is a specter of a 25 percent cut in the Medicare reimbursements?" said David Merritt, a health policy expert at Newt Gingrich's Center for Health Transformation. "Finding a permanent solution, it has to be at the top of the agenda."
President Obama agrees. "For too long, we have confronted this reoccurring problem with temporary fixes and stop-gap measures," the president said in a statement released last week. "It’s time for a permanent solution that seniors and their doctors can depend on and I look forward to working with Congress to address this matter once and for all in the coming year.”
So, given that this is the rare issue that all sides agree needs a solution -- why hasn't one been crafted? It's enormously expensive.
The Congressional Budget Office estimates that it would cost an additional $275 billion to keep physician payments at their current levels through 2020.
So far, no one can figure out where that money would come from.
And that enormous cost would simply keep payments where they are, even as doctors' own costs will increase.
"Rather than fixing it, the politicians just postpone the problem and each time that they do that, there is more uncertainly for the physicians and other providers," said Dr. Harry S. Strothers III, president of the Georgia Academy of Family Physicians
Strothers said it's common after speaking engagements for people to approach him seeking help finding a doctor, including several just last week. "Two had just retired and found out the doctor they have been seeing for years didn't take Medicare," he said.
The problem is compounded in Georgia, Strothers said, because the state already has a shortage of primary care physicians.  That allows some doctors to continue to get a steady flow of patients without seeing people on Medicare, which covers about 15 percent of the state's residents.
Strothers said the ongoing problems with reimbursements will worsen the shortage of primary care doctors, based on what he has observed while teaching at the Morehouse School of Medicine.
"You have medical students and residents who have record loans to pay for school who are reading these stories and they are saying, ‘Why should I go into primary care -- and especially geriatrics -- because most of your patients are on Medicare," Strothers said.
Dr. Kay Kirkpatrick, a hand surgeon at Resurgens, the state's largest orthopedic group, said the practice would have limited Medicare patients had Congress not taken action last week.
Kirkpatrick said she and the other doctors in her practice are relieved, but they hope Congress begins to work on a longer-term solution immediately.
"This is a little bit bigger band-aid than what we put on before, but it's still a band-aid," she said. "The bleeding is still underneath."

'There's a tragedy unfolding here': asylum seeker boat dashed on Christmas Island cliffs


Asylum tragedy: 'There were people screaming'

Several people are feared dead after a boat which may have been carrying as many as 80 asylum seekers crashed into cliffs at Christmas Island.
d.
Christmas Island residents have told of looking on helplessly as an asylum seekers' boat carrying about 70 people smashed onto rocks in huge seas today with devastating results.
The Australian Federal Police has confirmed 41 survivors have been pulled from the wreckage, meaning the number of dead could still climb above 30 following the tragedy, which unfolded near Flying Fish Cove about 6am local time (10am AEDT) today.
The boat smashed up against the rocks, shown on a video image from Channel 7.
The boat smashed up against the rocks, shown on a video image from Channel 7.
The navy is trying to rescue survivors, but witnesses say they are facing an uphill struggle.
Christmas Island Shire president Gordon Thomson said, "There are people in the water crying out for help.
"There's a tragedy unfolding here. Speak to the police," he added.
Sky News footage of the scene.Click for more photos

Asylum-seeker boat crashes off Christmas Island

Sky News footage of the scene.
  • Sky News footage of the scene.
  • Sky News footage of the scene.
  • The stricken asylum boat in heavy swells off Christmas Island. Photo: Channel 7
  • The boat smashed up against the rocks, shown on a video image from Channel 7.
  • Sky News footage of the scene.

Witness Michael Foster told Sky News that survivors were being ferried to a customs boat in deeper waters as conditions were so bad that there was ''no chance to get on land ... unless they helicopter them (onshore)''.
''They may try to get them around the corner where it's calmer.
''The Navy were doing their best to get anybody they could as close as they could to the rocks, but most people were caught up close to the rocks and getting thrown into the rocks, which wasn't very nice. Kids and women screaming and people yelling out."

Mr Foster said there were four navy vessels out at the accident site and officials were rescuing about three to four of the asylum seekers at each time to get them to medical assistance.
'There was a lot of screaming'
Christmas Island resident Mick Tassone was watching the tragedy unfold 200 metres away.
"I'd say they just hit the rocks and have broken up. They had no chance," he said. "Unless they pick them up very quick I don't think they have much chance of surviving, its very rough."
He first saw the boat float past at 5am. "There was a lot of screaming, it was very rough out there.
"There is debris out in front. The hull is just floating past me now. It is broken up into bits and pieces. I have seen a lot of things that could have been people. It is raining and hazy but I wouldn't doubt they could have been bodies.
"I presume there are a lot of bodies in the water, probably all of them," he said. Several navy boats were still cruising around and attempting to make a rescue. "It is just about impossible to get a boat in a water off the island," he said.
Another witness said the situation was "pretty ugly". "The locals are throwing life jackets and ropes over the cliffs, but there's bodies floating around out there," he said.
"The Navy has arrived in [rescue boats] trying to pick up survivors but it's pretty tough. The waves are monstrous; they're seven or eight metres high."
One man with cuts was rescued and was taken away in an ambulance, the witness said.
"The boat's been destroyed. We can't get to them. The cliff face is around eight metres [high]."
About 50 residents were trying to help. The crash site is overlooked by the Golden Bosun Tavern.
Boat crashed in 'putrid' weather
Christmas Island was being battered by 3.7-metre swell and 24-knot winds blowing directly onshore at 7am today, maritime weather site willyweather.com.au reported.
Bureau of Meteorology severe weather regional manager Andrew Burton said the tempestuous conditions were expected to remain for several days, due to a monsoon in the area.
There would be frequent showers and thunderstorms, seas of up to four metres, with swells around three metres.
A business owner, who asked not to be named, said the boat was about five metres off the cliff in four-metre swell when he saw it, about 7am local time.
"I thought it was pretty obvious people were going to die," the man said.
"They were sitting out within metres off the cliff and they were all screaming, 'Help us.' [There were] waves pounding into it and a lot of backwash, really bad weather."
The boat had crashed against the cliff by the time the man returned from dropping a family member at work.
"I could see from the hill, about half an hour later, there were just sticks, just debris," he said.
The business owner said there was no sign of official rescuers when he first noticed the boat, but it had appeared quickly.
"Where it came in, it was very close to a point so it would have just drifted around a corner," he said. "It all would have happened very quickly, no one would have seen it coming for kilometres or anything, [it was] really sudden."
People were trying to drop life jackets down the cliff into the water and a navy patrol boat was launching smaller boats into the water.
The man said the weather was "putrid". "It's almost bordering on cyclonic, we've got really big waves, probably four to five metres," he said.
"It's raining, it's windy, it's horrible.
"We knew a week ago that the bad weather was coming and it's been here three days or so."
'People hanging off the boat'
Ally McNabb, who works at Barracks Cafe on the island, said waves were as high as 15 metres when the boat crashed.
She said her partner received a call about 6.30am and ran down to the rocks to help with the rescue.
''Everyone was standing on the rocks. They were getting as close as they could [to the boat] and throwing in life jackets.
''People were hanging off the side of the boat.''
She said witnesses told her that initially ''everyone was fine'' and the boat had been resting near the rocks for a while and had not touched them.
But then one big wave hit the boat and the passengers in it were all thrown on to the rocks, which are about five metres high, she said.
People trying to help were ''traumatised'' to see bodies in the water, Ms McNabb said.
Another witness on the island said that conditions were so rough would-be rescuers were unable to enter the water, with waves crashing over the jetty.
Locals who would normally be out fishing in the area had been unable to get their boats into the water.
"The water here is that bad at the moment, there is no way they could have got in safely," she said.
"The swell is huge."
John MacDonald, who runs an engineering business on the island, said high cliffs and the big swell meant there was no possibility of people getting to shore.
"There is very little hope of getting to shore in these conditions," he said.
There was nothing many people could do but stand and watch.
Official rescue under way
An Australian Federal Police spokeswoman said the federal police were responding to a maritime incident involving a suspected illegal entry vessel on Christmas Island.
The federal police and partner government agencies on Christmas Island were co-ordinating the immediate response to the incident and it was ongoing, she said.
"The AFP's priority is the safety of all those involved in the incident," she said.
A Customs and Border Protection statement said: "There is an ongoing situation which involves a rescue of people off Christmas Island. Our paramount priority is the safety of all involved. A further statement will be provided later in the day."
But a spokeswoman from Customs and Border Protection refused to answer questions about whether the organisation knew a boat was in the area prior to the incident.
She would not respond to questions about whether the boat had been tracked in the lead-up to today's events, or if it was known to be in danger of hitting the cliffs.
A media contact at the Department of Defence also refused to take questions on the sinking, instead referring all inquiries to Customs and Border Protection.
Michelle Foster of the National Critical Care and Trauma Response Centre at the Royal Darwin Hospital said the facility has been "made aware of the incident and is awaiting advice".
She was unable to say how many of the survivors might be brought to the centre and how severe their injuries would be.
Another boat stopped
A boat carrying eight suspected asylum seekers was boarded by Australian authorities at Christmas Island yesterday afternoon.
Australian Customs and Border Protection said officers from HMAS Pirie found the vessel north-west of Rocky Point with eight passengers and three crew members on board.
They were taken to Christmas Island for security and health checks.
The Immigration Department reports that, so far this year, 126 boats have arrived in Australia, with 2971 people housed at the detention centre on Christmas Island.
However, the opposition puts the figures at 197 boats and 5400 people.
- Chalpat Sonti, Daile Pepper, Georgina Robinson, Glenda Kwek, Thomas Hunter, Paul Tatnell and AAP

STOCKMAN EXPLAINS HOW IN THIRTY YEARS AMERICA SPENT ENOUGH…


 Dylan Ratigan
From Zero Hedge: After recently debunking the economic “recovery’s” flagrantly misrepresented employment data, the OMB’s David Stockman makes a third appearance in as many months (previously here and here), this time on Dylan Ratigan. And as always, it is a must see: key soundbite: “We have had a Fed engineered serial bubble, that has created the appearance of wealth, that has caused people to consume beyond their means through borrowing, and that has flushed the income and wealth of our society up to the top, as a result of the Fed turning the financial markets into a casino. These are pure casinos, they are not capital markets, they are not adding to the productive capacity of our economy, they simply are a bunch of robots trading with each other by the millisecond as a result of the Fed giving them zero cost overnight money, and giving them all kinds of hand signals on what to front-run.” It is almost as if Stockman reads Zero Hedge… And he continues: “The Fed is destroying prosperity by funding demand that we can’t support with earnings and productions, causing massive current accounts deficits and the flow of funds overseas and the build up in China, OPEC and Korea of massive dollar reserves which is a totally unsustainable, unsupportable system, and we are coming near the edge of where that can continue to remain stable.” Ironically, Stockman is spot one when he notes that America incurred enough debt to have effectively LBOed itself. The net result, as every PE principal knows all too well, is a husk of an entity, whose most valuable assets have been bled dry. At this point, the last straw for America will be the inevitable rise in interest rates (at some point over the next five years, the Fed and Treasury will have to sell a combined $5 trillion in debt – that alone will destroy the supply/demand equilibrium and send rates surging) which will result in either debt repudiation or outright bankruptcy. The only good outcome is that the great experiment of LBOing America by the kleptocratic elite is coming to its sad conclusion.
Some other facts:
  • In 2000, there were 72 million middle-class jobs: manufacturing, construction, FIRE, transportation, etc; today, there are 65 million jobs, we have lost 10% of our middle class supporting jobs. We have replaced these with part-time jobs.
  • In 1981 the national debt was $1 trillion. Today, it is $14 trillion. The economy in the same period is 3.5-4 times bigger, the national debt is 14 times bigger.
  • Booby-trapping the 2012 election with a the latest set of tax-cuts that expire just days ahead, will panic the White House into doing the wrong decision for the economy once again in another political trade off that delays the inevitable collapse.
Full clip:

Visit msnbc.com for breaking news, world news, and news about the economy

Building National Unity


High Speed rail Program Fails

A Secretive Banking Elite Rules Trading in Derivatives

December 11, 2010


Fred R. Conrad/The New York Times
PROTECTING THE CUSTOMER Daniel Singer runs a heating oil company in Elmsford, N.Y., and is a derivatives customer. In order to offer homeowners fixed-rate oil plans, he buys derivatives contracts. But since the trading system is not transparent, he can’t tell whether the prices he gets are fair or not.

House Advantage

Writing the Rules
This series examines how Wall Street tries to gain an upper hand.

Yuri Gripas/Agence France-Presse — Getty Images
A COST TO EVERYONE Gary Gensler of the Commodity Futures Trading Commission says the current system “adds up to higher costs to all Americans.”

Readers' Comments

Readers shared their thoughts on this article.
The men share a common goal: to protect the interests of big banks in the vast market for derivatives, one of the most profitable — and controversial — fields in finance. They also share a common secret: The details of their meetings, even their identities, have been strictly confidential.
Drawn from giants like JPMorgan Chase, Goldman Sachs and Morgan Stanley, the bankers form a powerful committee that helps oversee trading in derivatives, instruments which, like insurance, are used to hedge risk.
In theory, this group exists to safeguard the integrity of the multitrillion-dollar market. In practice, it also defends the dominance of the big banks.
The banks in this group, which is affiliated with a new derivatives clearinghouse, have fought to block other banks from entering the market, and they are also trying to thwart efforts to make full information on prices and fees freely available.
Banks’ influence over this market, and over clearinghouses like the one this select group advises, has costly implications for businesses large and small, like Dan Singer’s home heating-oil company in Westchester County, north of New York City.
This fall, many of Mr. Singer’s customers purchased fixed-rate plans to lock in winter heating oil at around $3 a gallon. While that price was above the prevailing $2.80 a gallon then, the contracts will protect homeowners if bitterly cold weather pushes the price higher.
But Mr. Singer wonders if his company, Robison Oil, should be getting a better deal. He uses derivatives like swaps and options to create his fixed plans. But he has no idea how much lower his prices — and his customers’ prices — could be, he says, because banks don’t disclose fees associated with the derivatives.
“At the end of the day, I don’t know if I got a fair price, or what they’re charging me,” Mr. Singer said.
Derivatives shift risk from one party to another, and they offer many benefits, like enabling Mr. Singer to sell his fixed plans without having to bear all the risk that oil prices could suddenly rise. Derivatives are also big business on Wall Street. Banks collect many billions of dollars annually in undisclosed fees associated with these instruments — an amount that almost certainly would be lower if there were more competition and transparent prices.
Just how much derivatives trading costs ordinary Americans is uncertain. The size and reach of this market has grown rapidly over the past two decades. Pension funds today use derivatives to hedge investments. States and cities use them to try to hold down borrowing costs. Airlines use them to secure steady fuel prices. Food companies use them to lock in prices of commodities like wheat or beef.
The marketplace as it functions now “adds up to higher costs to all Americans,” said Gary Gensler, the chairman of the Commodity Futures Trading Commission, which regulates most derivatives. More oversight of the banks in this market is needed, he said.
But big banks influence the rules governing derivatives through a variety of industry groups. The banks’ latest point of influence are clearinghouses like ICE Trust, which holds the monthly meetings with the nine bankers in New York.
Under the Dodd-Frank financial overhaul, many derivatives will be traded via such clearinghouses. Mr. Gensler wants to lessen banks’ control over these new institutions. But Republican lawmakers, many of whom received large campaign contributions from bankers who want to influence how the derivatives rules are written, say they plan to push back against much of the coming reform. On Thursday, the commission canceled a vote over a proposal to make prices more transparent, raising speculation that Mr. Gensler did not have enough support from his fellow commissioners.
The Department of Justice is looking into derivatives, too.
On the third Wednesday of every month, the nine members of an elite Wall Street society gather in Midtown Manhattan.
The men share a common goal: to protect the interests of big banks in the vast market for derivatives, one of the most profitable — and controversial — fields in finance. They also share a common secret: The details of their meetings, even their identities, have been strictly confidential.
Drawn from giants like JPMorgan Chase, Goldman Sachs and Morgan Stanley, the bankers form a powerful committee that helps oversee trading in derivatives, instruments which, like insurance, are used to hedge risk.
In theory, this group exists to safeguard the integrity of the multitrillion-dollar market. In practice, it also defends the dominance of the big banks.
The banks in this group, which is affiliated with a new derivatives clearinghouse, have fought to block other banks from entering the market, and they are also trying to thwart efforts to make full information on prices and fees freely available.
Banks’ influence over this market, and over clearinghouses like the one this select group advises, has costly implications for businesses large and small, like Dan Singer’s home heating-oil company in Westchester County, north of New York City.
This fall, many of Mr. Singer’s customers purchased fixed-rate plans to lock in winter heating oil at around $3 a gallon. While that price was above the prevailing $2.80 a gallon then, the contracts will protect homeowners if bitterly cold weather pushes the price higher.
But Mr. Singer wonders if his company, Robison Oil, should be getting a better deal. He uses derivatives like swaps and options to create his fixed plans. But he has no idea how much lower his prices — and his customers’ prices — could be, he says, because banks don’t disclose fees associated with the derivatives.
“At the end of the day, I don’t know if I got a fair price, or what they’re charging me,” Mr. Singer said.
Derivatives shift risk from one party to another, and they offer many benefits, like enabling Mr. Singer to sell his fixed plans without having to bear all the risk that oil prices could suddenly rise. Derivatives are also big business on Wall Street. Banks collect many billions of dollars annually in undisclosed fees associated with these instruments — an amount that almost certainly would be lower if there were more competition and transparent prices.
Just how much derivatives trading costs ordinary Americans is uncertain. The size and reach of this market has grown rapidly over the past two decades. Pension funds today use derivatives to hedge investments. States and cities use them to try to hold down borrowing costs. Airlines use them to secure steady fuel prices. Food companies use them to lock in prices of commodities like wheat or beef.
The marketplace as it functions now “adds up to higher costs to all Americans,” said Gary Gensler, the chairman of the Commodity Futures Trading Commission, which regulates most derivatives. More oversight of the banks in this market is needed, he said.
But big banks influence the rules governing derivatives through a variety of industry groups. The banks’ latest point of influence are clearinghouses like ICE Trust, which holds the monthly meetings with the nine bankers in New York.
Under the Dodd-Frank financial overhaul, many derivatives will be traded via such clearinghouses. Mr. Gensler wants to lessen banks’ control over these new institutions. But Republican lawmakers, many of whom received large campaign contributions from bankers who want to influence how the derivatives rules are written, say they plan to push back against much of the coming reform. On Thursday, the commission canceled a vote over a proposal to make prices more transparent, raising speculation that Mr. Gensler did not have enough support from his fellow commissioners.
The Department of Justice is looking into derivatives, too. The department’s antitrust unit is actively investigating “the possibility of anticompetitive practices in the credit derivatives clearing, trading and information services industries,” according to a department spokeswoman.
Indeed, the derivatives market today reminds some experts of the Nasdaq stock market in the 1990s. Back then, the Justice Department discovered that Nasdaq market makers were secretly colluding to protect their own profits. Following that scandal, reforms and electronic trading systems cut Nasdaq stock trading costs to 1/20th of their former level — an enormous savings for investors.
“When you limit participation in the governance of an entity to a few like-minded institutions or individuals who have an interest in keeping competitors out, you have the potential for bad things to happen. It’s antitrust 101,” said Robert E. Litan, who helped oversee the Justice Department’s Nasdaq investigation as deputy assistant attorney general and is now a fellow at the Kauffman Foundation. “The history of derivatives trading is it has grown up as a very concentrated industry, and old habits are hard to break.”
Representatives from the nine banks that dominate the market declined to comment on the Department of Justice investigation.
Clearing involves keeping track of trades and providing a central repository for money backing those wagers. A spokeswoman for Deutsche Bank, which is among the most influential of the group, said this system will reduce the risks in the market. She said that Deutsche is focused on ensuring this process is put in place without disrupting the marketplace.
The Deutsche spokeswoman also said the banks’ role in this process has been a success, saying in a statement that the effort “is one of the best examples of public-private partnerships.”
Established, But Can’t Get In
The Bank of New York Mellon’s origins go back to 1784, when it was founded by Alexander Hamilton. Today, it provides administrative services on more than $23 trillion of institutional money.
Recently, the bank has been seeking to enter the inner circle of the derivatives market, but so far, it has been rebuffed.
Bank of New York officials say they have been thwarted by competitors who control important committees at the new clearinghouses, which were set up in the wake of the financial crisis.
Bank of New York Mellon has been trying to become a so-called clearing member since early this year. But three of the four main clearinghouses told the bank that its derivatives operation has too little capital, and thus potentially poses too much risk to the overall market.
The bank dismisses that explanation as absurd. “We are not a nobody,” said Sanjay Kannambadi, chief executive of BNY Mellon Clearing, a subsidiary created to get into the business. “But we don’t qualify. We certainly think that’s kind of crazy.”
The real reason the bank is being shut out, he said, is that rivals want to preserve their profit margins, and they are the ones who helped write the membership rules.
Mr. Kannambadi said Bank of New York’s clients asked it to enter the derivatives business because they believe they are being charged too much by big banks. Its entry could lower fees. Others that have yet to gain full entry to the derivatives trading club are the State Street Corporation, and small brokerage firms like MF Global and Newedge.
The criteria seem arbitrary, said Marcus Katz, a senior vice president at Newedge, which is owned by two big French banks.
“It appears that the membership criteria were set so that a certain group of market participants could meet that, and everyone else would have to jump through hoops,” Mr. Katz said.
The one new derivatives clearinghouse that has welcomed Newedge, Bank of New York and the others — Nasdaq — has been avoided by the big derivatives banks.
Only the Insiders Know
How did big banks come to have such influence that they can decide who can compete with them?
Ironically, this development grew in part out of worries during the height of the financial crisis in 2008. A major concern during the meltdown was that no one — not even government regulators — fully understood the size and interconnections of the derivatives market, especially the market in credit default swaps, which insure against defaults of companies or mortgages bonds. The panic led to the need to bail out the American International Group, for instance, which had C.D.S. contracts with many large banks.
In the midst of the turmoil, regulators ordered banks to speed up plans — long in the making — to set up a clearinghouse to handle derivatives trading. The intent was to reduce risk and increase stability in the market.
Two established exchanges that trade commodities and futures, the InterContinentalExchange, or ICE, and the Chicago Mercantile Exchange, set up clearinghouses, and, so did Nasdaq.
Each of these new clearinghouses had to persuade big banks to join their efforts, and they doled out membership on their risk committees, which is where trading rules are written, as an incentive.
None of the three clearinghouses would divulge the members of their risk committees when asked by a reporter. But two people with direct knowledge of ICE’s committee said the bank members are: Thomas J. Benison of JPMorgan Chase & Company; James J. Hill of Morgan Stanley; Athanassios Diplas of Deutsche Bank; Paul Hamill of UBS; Paul Mitrokostas of Barclays; Andy Hubbard of Credit Suisse; Oliver Frankel of Goldman Sachs; Ali Balali of Bank of America; and Biswarup Chatterjee of Citigroup.
Through representatives, these bankers declined to discuss the committee or the derivatives market. Some of the spokesmen noted that the bankers have expertise that helps the clearinghouse.
Many of these same people hold influential positions at other clearinghouses, or on committees at the powerful International Swaps and Derivatives Association, which helps govern the market.
Critics have called these banks the “derivatives dealers club,” and they warn that the club is unlikely to give up ground easily.
“The revenue these dealers make on derivatives is very large and so the incentive they have to protect those revenues is extremely large,” said Darrell Duffie, a professor at the Graduate School of Business at Stanford University, who studied the derivatives market earlier this year with Federal Reserve researchers. “It will be hard for the dealers to keep their market share if everybody who can prove their creditworthiness is allowed into the clearinghouses. So they are making arguments that others shouldn’t be allowed in.”
Perhaps no business in finance is as profitable today as derivatives. Not making loans. Not offering credit cards. Not advising on mergers and acquisitions. Not managing money for the wealthy.
The precise amount that banks make trading derivatives isn’t known, but there is anecdotal evidence of their profitability. Former bank traders who spoke on condition of anonymity because of confidentiality agreements with their former employers said their banks typically earned $25,000 for providing $25 million of insurance against the risk that a corporation might default on its debt via the swaps market. These traders turn over millions of dollars in these trades every day, and credit default swaps are just one of many kinds of derivatives.
The secrecy surrounding derivatives trading is a key factor enabling banks to make such large profits.
If an investor trades shares of Google or Coca-Cola or any other company on a stock exchange, the price — and the commission, or fee — are known. Electronic trading has made this information available to anyone with a computer, while also increasing competition — and sharply lowering the cost of trading. Even corporate bonds have become more transparent recently. Trading costs dropped there almost immediately after prices became more visible in 2002.
Not so with derivatives. For many, there is no central exchange, like the New York Stock Exchange or Nasdaq, where the prices of derivatives are listed. Instead, when a company or an investor wants to buy a derivative contract for, say, oil or wheat or securitized mortgages, an order is placed with a trader at a bank. The trader matches that order with someone selling the same type of derivative.
Banks explain that many derivatives trades have to work this way because they are often customized, unlike shares of stock. One share of Google is the same as any other. But the terms of an oil derivatives contract can vary greatly.
And the profits on most derivatives are masked. In most cases, buyers are told only what they have to pay for the derivative contract, say $25 million. That amount is more than the seller gets, but how much more — $5,000, $25,000 or $50,000 more — is unknown. That’s because the seller also is told only the amount he will receive. The difference between the two is the bank’s fee and profit. So, the bigger the difference, the better for the bank — and the worse for the customers.
It would be like a real estate agent selling a house, but the buyer knowing only what he paid and the seller knowing only what he received. The agent would pocket the difference as his fee, rather than disclose it. Moreover, only the real estate agent — and neither buyer nor seller — would have easy access to the prices paid recently for other homes on the same block.
An Electronic Exchange?
Two years ago, Kenneth C. Griffin, owner of the giant hedge fund Citadel Group, which is based in Chicago, proposed open pricing for commonly traded derivatives, by quoting their prices electronically. Citadel oversees $11 billion in assets, so saving even a few percentage points in costs on each trade could add up to tens or even hundreds of millions of dollars a year.
But Mr. Griffin’s proposal for an electronic exchange quickly ran into opposition, and what happened is a window into how banks have fiercely fought competition and open pricing. To get a transparent exchange going, Citadel offered the use of its technological prowess for a joint venture with the Chicago Mercantile Exchange, which is best-known as a trading outpost for contracts on commodities like coffee and cotton. The goal was to set up a clearinghouse as well as an electronic trading system that would display prices for credit default swaps.
Big banks that handle most derivatives trades, including Citadel’s, didn’t like Citadel’s idea. Electronic trading might connect customers directly with each other, cutting out the banks as middlemen.
So the banks responded in the fall of 2008 by pairing with ICE, one of the Chicago Mercantile Exchange’s rivals, which was setting up its own clearinghouse. The banks attached a number of conditions on that partnership, which came in the form of a merger between ICE’s clearinghouse and a nascent clearinghouse that the banks were establishing. These conditions gave the banks significant power at ICE’s clearinghouse, according to two people with knowledge of the deal. For instance, the banks insisted that ICE install the chief executive of their effort as the head of the joint effort. That executive, Dirk Pruis, left after about a year and now works at Goldman Sachs. Through a spokesman, he declined to comment.
The banks also refused to allow the deal with ICE to close until the clearinghouse’s rulebook was established, with provisions in the banks’ favor. Key among those were the membership rules, which required members to hold large amounts of capital in derivatives units, a condition that was prohibitive even for some large banks like the Bank of New York.
The banks also required ICE to provide market data exclusively to Markit, a little-known company that plays a pivotal role in derivatives. Backed by Goldman, JPMorgan and several other banks, Markit provides crucial information about derivatives, like prices.
Kevin Gould, who is the president of Markit and was involved in the clearinghouse merger, said the banks were simply being prudent and wanted rules that protected the market and themselves.
“The one thing I know the banks are concerned about is their risk capital,” he said. “You really are going to get some comfort that the way the entity operates isn’t going to put you at undue risk.”
Even though the banks were working with ICE, Citadel and the C.M.E. continued to move forward with their exchange. They, too, needed to work with Markit, because it owns the rights to certain derivatives indexes. But Markit put them in a tough spot by basically insisting that every trade involve at least one bank, since the banks are the main parties that have licenses with Markit.
This demand from Markit effectively secured a permanent role for the big derivatives banks since Citadel and the C.M.E. could not move forward without Markit’s agreement. And so, essentially boxed in, they agreed to the terms, according to the two people with knowledge of the matter. (A spokesman for C.M.E. said last week that the exchange did not cave to Markit’s terms.)
Still, even after that deal was complete, the Chicago Mercantile Exchange soon had second thoughts about working with Citadel and about introducing electronic screens at all. The C.M.E. backed out of the deal in mid-2009, ending Mr. Griffin’s dream of a new, electronic trading system.
With Citadel out of the picture, the banks agreed to join the Chicago Mercantile Exchange’s clearinghouse effort. The exchange set up a risk committee that, like ICE’s committee, was mainly populated by bankers.
It remains unclear why the C.M.E. ended its electronic trading initiative. Two people with knowledge of the Chicago Mercantile Exchange’s clearinghouse said the banks refused to get involved unless the exchange dropped Citadel and the entire plan for electronic trading.
Kim Taylor, the president of Chicago Mercantile Exchange’s clearing division, said “the market” simply wasn’t interested in Mr. Griffin’s idea.
Critics now say the banks have an edge because they have had early control of the new clearinghouses’ risk committees. Ms. Taylor at the Chicago Mercantile Exchange said the people on those committees are supposed to look out for the interest of the broad market, rather than their own narrow interests. She likened the banks’ role to that of Washington lawmakers who look out for the interests of the nation, not just their constituencies.
“It’s not like the sort of representation where if I’m elected to be the representative from the state of Illinois, I go there to represent the state of Illinois,” Ms. Taylor said in an interview.
Officials at ICE, meantime, said they solicit views from customers through a committee that is separate from the bank-dominated risk committee.
“We spent and we still continue to spend a lot of time on thinking about governance,” said Peter Barsoom, the chief operating officer of ICE Trust. “We want to be sure that we have all the right stakeholders appropriately represented.”
Mr. Griffin said last week that customers have so far paid the price for not yet having electronic trading. He puts the toll, by a rough estimate, in the tens of billions of dollars, saying that electronic trading would remove much of this “economic rent the dealers enjoy from a market that is so opaque.”
“It’s a stunning amount of money,” Mr. Griffin said. “The key players today in the derivatives market are very apprehensive about whether or not they will be winners or losers as we move towards more transparent, fairer markets, and since they’re not sure if they’ll be winners or losers, their basic instinct is to resist change.”
In, Out and Around Henhouse
The result of the maneuvering of the past couple years is that big banks dominate the risk committees of not one, but two of the most prominent new clearinghouses in the United States.
That puts them in a pivotal position to determine how derivatives are traded.
Under the Dodd-Frank bill, the clearinghouses were given broad authority. The risk committees there will help decide what prices will be charged for clearing trades, on top of fees banks collect for matching buyers and sellers, and how much money customers must put up as collateral to cover potential losses.
Perhaps more important, the risk committees will recommend which derivatives should be handled through clearinghouses, and which should be exempt.
Regulators will have the final say. But banks, which lobbied heavily to limit derivatives regulation in the Dodd-Frank bill, are likely to argue that few types of derivatives should have to go through clearinghouses. Critics contend that the bankers will try to keep many types of derivatives away from the clearinghouses, since clearinghouses represent a step towards broad electronic trading that could decimate profits.
The banks already have a head start. Even a newly proposed rule to limit the banks’ influence over clearing allows them to retain majorities on risk committees. It remains unclear whether regulators creating the new rules — on topics like transparency and possible electronic trading — will drastically change derivatives trading, or leave the bankers with great control.
One former regulator warned against deferring to the banks. Theo Lubke, who until this fall oversaw the derivatives reforms at the Federal Reserve Bank of New York, said banks do not always think of the market as a whole as they help write rules.
“Fundamentally, the banks are not good at self-regulation,” Mr. Lubke said in a panel last March at Columbia University. “That’s not their expertise, that’s not their primary interest.”