June 19, 2012
Thank you Chairman Bachus, Ranking Member Frank, and members of the Committee.
When I hand one of my three daughters the car keys, I sleep better knowing that there are common-sense rules of the road – there are stop signs, traffic lights and speed limits, there are prohibitions against drunk driving, and there are cops on the streets to enforce all these rules and keep my daughters safe.
Similarly when my mom and dad, neither of whom worked in finance or even completed college, invested their savings, our family benefited from the securities markets’ common-sense rules of the road.
It was during the Great Depression that President Roosevelt asked Congress to put in place rules to bring transparency to the securities, as well as to the futures markets, and protect investors against fraud, manipulation and other abuses.
I believe these critical reforms of the 1930s are at the foundation of our strong capital markets and many decades of economic growth.
Swaps subsequently emerged in the 1980s. They provide producers and merchants a means to lock in the price of commodities, interest rates and currency rates. Our economy benefits from a well-functioning swaps market, as it’s essential that companies have the ability to manage their risks.
The swaps marketplace, however, lacked necessary street lamps to bring it out of the shadows or traffic signals to protect the public from a financial crash.
In 2008, swaps, and in particular credit default swaps, concentrated risk in financial institutions and contributed to the financial crisis, the worst economic crisis Americans have experienced since the Great Depression.
Congress responded with the Dodd-Frank Act, bringing common-sense rules of the road to the swaps marketplace.
With regard to the CDS index products traded by JPMorgan Chase’s Chief Investment Office, the CFTC is currently midstream in standing up reforms that promote transparency and lower risk to the market. The CFTC has made significant progress on implementing the law’s historic reforms, having completed 33 key rules. But four years after the financial crisis and two years since the passage of Dodd-Frank, it’s time that we finish the job and complete nearly 20 remaining rules.
And we must not forget the lessons of the 2008 crisis and earlier. Swaps executed offshore by U.S. financial institutions can send risk straight back to our shores. It was true with the London and Cayman Islands affiliates of AIG, Lehman Brothers, Citigroup and Bear Stearns. A decade earlier, it was true, as well, with Long-Term Capital Management.
The recent events of JPMorgan Chase, where it executed swaps through its London branch, are a stark reminder of this reality of modern finance.
For the public to be protected, swaps market reform should cover transactions with these overseas branches, overseas affiliates guaranteed by U.S. entities, and overseas affiliates operating as conduits for U.S. entities’ swaps activity. Failing to do so would mean American jobs and markets would likely move offshore, but, particularly in times of crisis, risk would come crashing back to our economy.
Some in the financial community have suggested that we retreat. Some in Congress have suggested cutting funding for market oversight.
But the ever-growing financial storm clouds hanging over Europe and lessons from the crisis should guide us – now is the time to bring common-sense rules of the road to the swaps market.
Eight million Americans lost their jobs, millions of families lost their homes, and small businesses across the country folded when financial institutions were permitted to drive on dimly lit swaps roads, which had no rules and no cops.
I’d think we’d all sleep better if the complex roads of the swaps market were well lit with transparency, had rules to lower risk to bystanders and the agency tasked with overseeing them had enough funding to police them.
Otherwise, I’d say hold on to your car keys.
Last Updated: July 17, 2012