Last week’s Swiss franc revaluation created turmoil in the currency markets and insolvencies among a number of foreign currency dealers — but not (to date) in the US. In 2009, says the Financial Times’ Paul Murphy, forex dealers were offering retail speculators leverage of up to 200 to 1 (99.5%). As he noted as far back as 2012, the dealers’ business model exploits speculators’ financial illiteracy: at leverage levels that high, even small currency market moves trigger big margin calls. When speculators can’t meet the calls, they get wiped out and the dealer pockets the collateral.
In 2009, the US derivatives industry’s private self-regulator, the National Futures Association, imposed capital requirements on dealers. In 2010, the Commodities Futures Trading Commission, despite 9,100 protest letters from speculators, limited customers’ leverage to a mere 50 to 1 (98%!).
US forex dealers warned that even with these modest requirements, much of the business would move to London — and so it did. Regulatory arbitrage can’t be eliminated. But came the bust, the US taxpayer wasn’t holding the bag for failed firms, and Citibank estimated that only 150,000 of 4 million retail forex traders lived in the US.
Simple leverage and capital regulation is straightforward to enforce — which raises the question of why Dodd Frank’s vaunted Qualified Mortgage and Qualified Residential Mortgage rules effectively rejected it. In its real estate remake of Groundhog Day, the Obama administration is again offering federally guaranteed 97% loan-to-value ratio mortgages while slashing premiums on already underpriced mortgage guarantees.
The key is crony capitalism: retail forex dealers were a small, grubby, marginal segment of the market, while the mortgage industrial complex is deeply wired into the White House and Congress.
No comments:
Post a Comment