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The Law of Unintended Consequences and the Broad Brush of Regulation
Here is an interesting email I ran across talking about the effects of the Dodd-Frank Legislation and the damage it is already having on legitimate businesses. Looks like our politicians are making a bad situation even worse.....
FYI, we are getting the effects of Dodd-Frank in the shorts already (literally and figuratively).
As you know, we trade in the shipping world and use derivatives to hedge some of our physical forward ship and cargo positions because there isn't any other way do so. Our business requires us to take physical positions of ships and cargos for up to two or three years ahead, and it is very difficult if not impossible to back those up with counterbalancing physical positions, wherefore an active derivatives market sprang up about 25 years ago.
We clear the derivatives trade through one of the largest Scandinavian banks, with which we have dealt for a number of years quite successfully.
Just this week we were told that this bank can no longer trade with us on shipping derivatives because of Dodd-Frank; indeed, it cannot trade any longer with any entity controlled or beneficially owned by American interests. Furthermore, we have first and secondhand evidence that many of the largest international banks in Euroland and elsewhere around the world are refusing to open (legal, not secret) accounts for American citizens or companies controlled by same because of the raft of documentation and legal quagmire they are now required to comply with.
Yes, and indeed they are closing existing accounts with such entities to avoid having to deal with the US Godvernment!
This cannot be good for our recovery, our economy, or our international relationships, and is going to get much worse. The halls of Congress are littered with economic charlatans indeed! A little follow-up to our discussion: seems that there are two immediate problems faced by the foreign banks vis-à-vis "Doodie-Frankenstein": The 2,500-odd pages of regs are written so vaguely that the foreign banks cannot determine their liability nor their position as to whether they are coming under US regulation per D-F or not, and must await decisions and clarification on many aspects thereof; and the Volcker Rule with its 300 pages of footnotes - if it applies to the foreign banks, actually precludes them from trading as principals in any derivative transactions with American- or US-based entities. Thus the foreign banks for the moment choose to avoid making any deals with any such entities in order to prevent themselves from beco ming liable if all the legal wrangles end up making them so.
Furthermore, we are aware first- and secondhand that many are even refusing to open simple bank accounts for Americans for fear of falling afoul of D-F and exposing themselves to US regulation. As for our clients, they are for the moment shut out of hedging opportunities on the paper side, but will have to find either far less satisfactory or liquid physical hedges, or remain exposed on their existing and prospective physical positions... not a comfortable place to be in these volatile times.
This really is a huge problem. Not a minor annoyance at all. Likely to extend to trade financing and anything to do with banking, and will make USA more of a pariah than ever.
Here is an interesting email I ran across talking about the effects of the Dodd-Frank Legislation and the damage it is already having on legitimate businesses. Looks like our politicians are making a bad situation even worse.....
FYI, we are getting the effects of Dodd-Frank in the shorts already (literally and figuratively).
As you know, we trade in the shipping world and use derivatives to hedge some of our physical forward ship and cargo positions because there isn't any other way do so. Our business requires us to take physical positions of ships and cargos for up to two or three years ahead, and it is very difficult if not impossible to back those up with counterbalancing physical positions, wherefore an active derivatives market sprang up about 25 years ago.
We clear the derivatives trade through one of the largest Scandinavian banks, with which we have dealt for a number of years quite successfully.
Just this week we were told that this bank can no longer trade with us on shipping derivatives because of Dodd-Frank; indeed, it cannot trade any longer with any entity controlled or beneficially owned by American interests. Furthermore, we have first and secondhand evidence that many of the largest international banks in Euroland and elsewhere around the world are refusing to open (legal, not secret) accounts for American citizens or companies controlled by same because of the raft of documentation and legal quagmire they are now required to comply with.
Yes, and indeed they are closing existing accounts with such entities to avoid having to deal with the US Godvernment!
This cannot be good for our recovery, our economy, or our international relationships, and is going to get much worse. The halls of Congress are littered with economic charlatans indeed! A little follow-up to our discussion: seems that there are two immediate problems faced by the foreign banks vis-à-vis "Doodie-Frankenstein": The 2,500-odd pages of regs are written so vaguely that the foreign banks cannot determine their liability nor their position as to whether they are coming under US regulation per D-F or not, and must await decisions and clarification on many aspects thereof; and the Volcker Rule with its 300 pages of footnotes - if it applies to the foreign banks, actually precludes them from trading as principals in any derivative transactions with American- or US-based entities. Thus the foreign banks for the moment choose to avoid making any deals with any such entities in order to prevent themselves from beco ming liable if all the legal wrangles end up making them so.
Furthermore, we are aware first- and secondhand that many are even refusing to open simple bank accounts for Americans for fear of falling afoul of D-F and exposing themselves to US regulation. As for our clients, they are for the moment shut out of hedging opportunities on the paper side, but will have to find either far less satisfactory or liquid physical hedges, or remain exposed on their existing and prospective physical positions... not a comfortable place to be in these volatile times.
This really is a huge problem. Not a minor annoyance at all. Likely to extend to trade financing and anything to do with banking, and will make USA more of a pariah than ever.