Friendless but lucky

It was a surprise to even those observers inured to the muddled multi-year saga of US derivatives regulation, deregulation and re-regulation to see Richard Lugar, the senator who was instrumental in driving through landmark US derivatives deregulation legislation in 2000, now trying to resurrect and expand senator Dianne Feinstein’s bill to expand oversight of the energy derivatives market.

Remember, this is the guy who gave the keynote address at the International Swaps and Derivatives Association’s annual general meeting last year in Washington.If Lugar backs this type of legislation, does the industry have any friends left in Washington?

Well, at least one: the remaining stalwart from the original four regulatory bigwigs who, under the aegis of the ‘President’s Working Group on Financial Markets’, signed off on the landmark 1999 report that urged deregulation of the over-the-counter derivatives industry – Alan Greenspan – is taking up the cudgels again. In a strongly worded speech late last month, he attacked proposals for more disclosure of proprietary information and otherwise bravely breathed his usual fire to an audience... in London.

OK, Greenspan has a full-time job keeping his game-face on at home, trying to prop up the consumers’ and the markets’ failing belief that the Fed can keep the economy from spiralling into the abyss. And London’s Society of Business Economists was probably not the most hostile audience for Greenspan’s ringing endorsement of free markets and innovation.

And Greenspan, along with the rest of the current President’s Working Group (consisting of the chairs of the Fed, the Securities and Exchange Commission and the Commodity Futures Trading Commission, along with the secretary of the Treasury) has in fact weighed in against the new legislative initiative, firing off a strongly worded letter to its backers. (Industry pitbull Isda bared its teeth two days later in a release saying it ‘concurs’ with the regulators.) But clearly the political capital these regulators will be willing to spend defending derivatives dealers, while they and their Justice Department brethren investigate these same insti- tutions for a host of alleged misdeeds, is limited.

It’s only a small exaggeration to say the bulge bracket of the dealer community, the very sources of the money that once flowed to election campaigns and the lobbyists that once swarmed over Gucci Gulch, have no credibility in Washington, and they are tempting targets for pre-election political posturing.

The equity analyst scandals are a perfect case study in the costs of reputational risk – no politician on the eve of mid-term elections is going to think to cut the dealers any slack on derivatives issues when pillorying them for their stock-sales abuses plays so well to voters. Not all US voters know the name Mahonia, but they probably know Enron and WorldCom, and many certainly know Jack Grubman. Who believes, a month short of elections, that politicians will waste time making distinctions among the scandals?

In a way, derivatives dealers are lucky that so much is going on in the US. With the debate over Iraq, economic worries and the war on terror, few US politicians have the time to actually bring a re-regulation bill to fruition. But this isn’t a government relations strategy, it is simply good fortune.