this is why you should care only. if. these are the top stories. president. revolutions begin by stagnant and hard. to break through or break down a. negotiation between the west. and leaders are getting together in brussels to discuss salvation for the eurozone . believing it's time. to provide her take on the main headlines of the day you're watching.

good afternoon and welcome to capital account i'm lauren lyster here in washington d.c. these are your headlines from a tuesday may twenty second two thousand and twelve regulators were on capitol hill today from the f.c.c. and as the f.t.c. to talk about how that overhaul of that six hundred trillion dollars opaque unregulated over the counter derivatives market is going as you know derivatives were of course at the center of the j.p. morgan trading blowup so the law has seemingly reignited scrutiny from washington but here's a copy of before you get too hopeful about this senate banking committee guess who

has reportedly been this single biggest donor to the chair of this committee yeah that's right j.p. morgan will talk about it and who's the regulator we really want to hear from how about the one that oversees america's largest banks the office of the comptroller of the currency the o.c.c. it reportedly pledged to take a more aggressive approach to regulation after they didn't see caught heat for being a lax in the run up to the two thousand and eight crash now obviously facing some questions about follow through william k. black will help us understand why it's been the watchdog that won't do this. bark and the u.s. is largest foreign creditors china can now bypass wall street altogether and buy u.s. government debt straight from the u.s. treasury making this the treasury's first ever direct relationship with

a foreign government dats all according to reuters. we will discuss it let's get to today's capital account. our next guest has called regulators such as the office of controller of the currency and the federal reserve the dogs that once again failed to bark in j.p. morgan's trading loss that multibillion dollar trading loss those are j.p. morgan's main regulators now meanwhile it was two other regulators we heard from on capitol hill today that as easy and this the f.t.c. on derivatives reform and of course j.p. morgan was a large focus of the hearing now officials said investigations of j.p.

morgan are under way at both of their agencies fittingly news comes out that j.p. morgan has hired a former s.e.c. enforcement chief to assist the firm and probes of its loss on credit derivatives trading according to reports how fitting this just all is one insists he was big circle to talk more about it william k. black is here he's associate professor of economics and law at the university of missouri kansas city and it's really so great to talk to you because you are the expert on all of these regulatory issues which just never seem to make sense when we have something like a hearing on the hill today first of all thanks so much for being on the show. thank you ok so professor black today we hear on the hill the f.c.c. and a c f t c top officials saying hey we learned about this j.p. morgan trade from press reports and then as far as the main regulator of the banks

or one of them the o.c.c. they at first officials were coming out saying this trade would have been allowed under the volcker rule then a week later according to reports they disowned the opposition and said hey more information come out we don't know we take that back standing back and watching all this it sounds like they're either incompetent or complicit in your view and your experience which i think it is well it's far more complicity the federal reserve and the treasury and the office of the come through currency is a euro within treasury were two of the leading opponents of the volcker rule so treasury secretary geithner the boss of the boss of the o.c.c. hates the little rule them the fed hates the volcker rule and the reason of course is that both in and of the u.s. treasury and the federal reserve are so heavily aligned with the interest of the largest banks in the world the systemically dangerous institutions and then on the

flip side of this you have the senate banking committee holding this hearing today and a lot of the media outlets have been previewing that this is where jamie diamond will testify soon you have the chair man who according to the center for responsive politics can thank j.p. morgan as his largest campaign contributor so should we take a hearing like this seriously at all or is it just a dog and pony show well you should take it is possibly serious it's amazing sometimes even in dog and pony shows people. blunder so badly that they hurt themselves tremendously. it is true that. finding out is the leading contributor to both political parties and it's certainly true that you know for example house finance committee is now gargantuan when you

look there's a cli and the seat just for the members swallow all in which they meet and the reason is that committee has been expanded dramatically and the reason the committee he has been expanded dramatically in size is because if you're put on that committee you will get a fortune in camp pain contributions so both political parties when they have someone elected in a close race that could be easily contested they tend to put them on that committee to give them a leg up in fundraising and that's how sick the world is that the committee isn't there to protect us it's to give you a leg up and maybe not for their expertise either i thought it was a little bit shocking just anecdotally to hear one of the lawmakers today asking whether that as the c n c f t c were doing a civil or a criminal probe not knowing presumably that the c.c. couldn't do a criminal probe of of j.p.

morgan which i thought was a little odd on that note of accountability though ok so the o.c.c. and the fed will talk about them there j.p. morgan's main bank regulators here's what the as they see those said they had responsibility over with regards to j.p. morgan's trading loss according to mary shapiro in that hearing today let's take a listen. when they talked about the their potential all the risks that they faced as a business when they talk about potential losses under their foreign model we are very focused on the accuracy and the timeliness of that disclosure so she mentions the bar model's the value at risk and this is where they would have come into play as having some oversight now we know that j.p. morgan day their risk models the bar models within this show the london wales office they changed those models then they announced this trading laws then jamie dimon said hey and we're going back to those old models we don't know a lot about how or why or what went into that but in your view did that as these

the mess up here did they miss this. well first the broader point it's very strange that you're starting the day congress is starting with the f.c.c. and the c t c the clown who shoots a trading commission because they are not the direct regulators of j.p. morgan right at best they are ancillary to this story and so you know you should be starting with the bank regulators who should have the fundamental expertise about what actually happened here and that would be particularly important because j.p. morgan's plaques have been putting out all the information and they put out at least four stories each of which contradicts the other and each of which is financially illiterate so you know they're not true any of those four stories and we've heard nothing from the regulators who are supposed to know about what actually happened

and how could you start with a discussion by the f.c.c. and the commodity futures trading commission when you still have no idea what actually happened yeah i couldn't agree more with your broader point as far as the as a theme which obviously has a very tangential role as not and regulator of the bank and didn't do you think that they missed anything with at least the risk reporting and j.p. morgan and of the value wreck models that were changed. i think they missed something far broader and that is that j.p. morgan has fundamentally been lying for years about what it does to j.p. morgan in fact runs a huge speculative betting operation primarily on financial derivatives and there's a bloomberg story today that says that they have more speculative positions in non-governmental securities and derivatives than the next three largest banks come

bind and it says also that j.p. morgan has been massively increasing the percentage both of its portfolio in these very risky to rivet is now that is precisely what the bowker rule was designed to prevent and the volcker rule fundamentally should have support all across the political spectrum in particular from conservatives and libertarians what it says is if we're going to federally subsidized you and we do if you're a bank through deposit insurance that's the express subsidy but for an institution like j.p. morgan which is too big to fail and we are have them that astley greater implicit federal subsidy of too big to fail that means they can borrow money from creditors far more cheaply because the creditors are not going to suffer losses in even if j.p. morgan fails because we the government will bail them out and in those circumstances

it would be out rageous to allow such the institution to gamble on derivatives write if they won that authors would get rich and if they lost all the losses would come to the public and let's get into derivatives more about first to touch on volcker role you have pointed out that the volcker rule does bar in the trap that we have of that which is that final dot the standard of heading it when it comes to exemption could you tell us what had you nothing. sure. the whole purpose of the rule again was to keep you from owning positions with these federal subsidies where you are gambling securities and so there is one big exception and it's an appropriate exception and says if you are doing this to reduce risk through edging then it's ok except that that's not what j.p.

morgan and probably most of its fellow systemically dangerous institutions are doing j.p. morgan quite clearly is simply taking bets. in other words exactly what the book rules said you can do but here's the kicker. when they do that they close to the derivative. now here disposed to be something that offsets loss in something else and therefore minimizes risk but as you've just seen in this. genus instead of reducing risk their second bit was in the same direction so the losses didn't say that they did he teach other so this is a man line system a massive line is down and when we get back from break we're going to go to a quick break we'll come back with you professor black we're going to talk about

lying and maybe how derivatives unable some of this also you know on that note of calling this hedging it feels like something we've been talking about in the newsroom if it looks like a duck and acts like a wall street banks we'll call it a buffalo and a lot of people in power will believe them how to change that we'll talk about when we get back with william black associate professor at the university of missouri kansas city also still ahead calling all unemployed men jazz and jet i if you consider yourself either one of those or perhaps a rock star guess what employer is why you will give you our three cents on the one it adds but first your closing market numbers. are sure is that so much money which of course you want to hear no but it's pretty

good summit in chicago this military alliance decided many things in principle like ending the occupation of. technology innovation all the developments around. the future are covered. welcome back so we we had a hearing on the hill today and it was a good reminder about this because we always hear dog frank reform was passed but in reality a lot of it hasn't been put into place yet as the f.t.c. chairman gary gensler reminded us today in regards to the overall this seven hundred trillion dollar derivatives market which this agency has

a role in over saying so you think of course naturally since they have a role in overseeing it that they would have a role with j.p. morgan and this trading loss on credit derivatives but gensler says they didn't because j.p. morgan isn't registered as a swaps dealer yet take a listen but you're these are the only ones lee and there's nothing you know there's things that have not crystal in the regulatory function in well over such a big. the back is overseen by bank regulators but under dodd frank the market regulators as marker as we will stand up and oversee swop dealing activity in a bag or an affiliate of a bank or securities spacewalk dealing activity but you're right currently the american public is not protected in that way. and currently he says they have completed about house of the rules so far that they have been tasked with completing let's bring back william k.

black he is breaking this all down for us and all of the problems with these rules and regulations still he's associate professor of economics and law at the university of missouri kansas city also played a major role and seeing that bad actors in the savings and loan crisis went to prison so really he's someone who has gone after some of these bad actors unlike any of the officials seem to today so we have this derivatives hearing today professor black but could you break down to what for us in your view how big of an issue it is these over the counter derivatives that are unregulated opaque and perhaps more importantly not priced by the market as an exchange traded future you know these are immensely important and are they were a major cause of the on go going global crisis and they are odds on favorite

to cause the next global crisis and the volcker rule is one of the essential aspects to dealing with it so to back up a bit. in the last year of the clinton administration and a bipartisan group got together at the behest of the industry to crush brooksley born who was then the chair of the commodities futures trading commission and warning about credit default swaps and the act that was passed the commodities futures modernization act of two thousand and four bad the c f t c from issuing any rules. to protect the nation even exempted. credit default swaps from state broad laws if you can believe that passing something that said you could actually commit fraud so that there is the.

rage is thing and if dodd frank had been serious there would have been a one sentence in it instead of six hundred pages that's a lot of these future modernization act is repealed. but they didn't do that but they did do to compromise this is one of the vocal rule that we discussed the other was saying this world is over the counter derivatives is completely opaque vastly dangerous you must do it through a clearing house now that is not a fix as to the systemic risk they cause but it least it makes it less opaque yeah it's also not a fix as to risk as we've seen with m.f. global which did operate with some on an exchange at first for a lot of the customers but well my question for you on the volcker rule or any other regulation in the pipeline what any of that keep a bank from say moving money to a london where shadow banking is less regulated or to the more i lens as gary

gensler mentioned in his testimony today and doing as they please and getting around the role. yes first there would have been four things that could have stopped this first if glass steagall was not repealed it would have been on lawful second if the commodities futures modernization act was not passed it likely would been banned by brooksley born third if the vocal ruler in place and it isn't because. j.p. morgan has led the charge to delay the effect and this is the rule and if the rule actually met the intent of congress which it in the current draft does not again because j.p. morgan's effect of lobbying with treasury and the fed then you couldn't have done it under the volcker rule and if the requirements for the clearing

house were in effect they couldn't have made these investments either because this when the a benchley bet on this particular derivative of a driv it of that caused a disaster this was not something that would have ever gone successfully on a clearing house ha that's a very cape oint before we go we just have a minute but just so that everybody is clear we know the benefit of derivatives to these bankers who basically can make a lot of money on paper profits while things are going well and then when things blow up we know who is on the line it's all of us have a systemically important institution but just in case anybody is claire or i'm claire what purpose do over the counter derivatives serve to society. virtually none and they're not systemically important organizations like they deserve a gold star they're systemically dangerous they world would be so you further the

banks would be more efficient and we would have a better shot at having democracy returned if they were shrunk massively paul volcker said it well just once he wished that some neutral party could provide one shred of evidence that these kinds of derivatives actually make the world better in any way and i would love to see some evidence now as i'm sure a lot of people would i appreciate you being on the show and clear in this all out for us thanks so much that was william black associate professor at the university of missouri kansas city.

all right let's wrap up with loose change dimitris shanahan yes it has some serious v.i.p. status for people that bankroll the u.s. and. the u.s. is relationship with china as its largest creditor has been the topic of political debate even saturday night jabs take a look. in fact now that i think about it all kinds. of. these. yes. well now china will do one point one seven trillion dollars in u.s. treasury has a much easier route to purchase more according to reuters the us treasury has given the people's bank of china a direct computer link to its auction system so china is now these first foreign government they just can bypass wall street bribe bypass primary dealers just go

straight to the treasury buy more debt what it was like we just want to cut out the middleman we want to make sure that there is like you know straight to the vein. like the stars to me like what they're doing is they're taking the they're saying for everyone else that you want to get smacked you've got to go to the dealers in the street but if you're china if you're to us and you want to get you want to get your fix you can go straight to the free to the store or to the source like denzel washington in the movie where you put that drug dealer for us read the source in vietnam or wherever it was but my point is you know maybe this is so that off the pier that actually spread the gold and makes. you know being a broker primary broker dealer so. i mean to be fair they should probably get some perks because. a lot of u.s. debt one of the largest organized under as best they can because of good point there are china and they've got to monetize more debt point janet you know anything one of the other central banks going to start crying foul. that's

a good point do you think other central banks will ask to be hooked up to and why would they want to know i mean this people are going to complain and bitch and moan about this we're going to be. more bank of new york mellon any of these primary broker dealers are going to be upset because we're going to lose the spread plus they may not be able to from the trade because they want to happens with regular treasuries so they're the ones that are going to be really upset about this the central banks only care think i mean maybe i'm missing something so china is even more v.i.p. then wall street cronies maybe moving on we know the job market is bad but when it comes to the help wanted ads it seems that employers why you to be one of these overwhelmingly middle of. so according to the wall street journal and this is kind of weird i don't even know what to make of this the number of job listings with the term ninja have increased

twenty five hundred percent in the past six years and jet eyes are wanted to employers seeking those of increased by sixty seven percent in the same period rock stars have increased by eight hundred ten percent so rockstar i get people want rock star employees as i don't get what i mean you know them to loans or the no job income or us the loans so maybe this is kind of a play off you're not really hiring someone they're trying to get in there the right or some accounting ploy for wall street you know you never know with these guys but it could also be this bizarre this really started to return to this fantasy world you know with star wars jet on. this kind of fantasy world where we don't want to live in the real world have real jobs and want to be there no no no no or or how about this we did that story in australia about how hells angels were being contracted to collect debts you think so maybe maybe employers need to collect debts let that stand in.

and is this not a teenage mutant ninja turtle variety but i mean i'm pretty sure i get hired well almost more one of them are you in the market for another job is that with this ninja mask is about his own look more like one of the wide shot for our it's our present. you know. movie i've seen eyes wide shut i have. to you our audience to go check it out really quickly we don't have time for the sound bite maybe you could play the footage while i'm talking about it because before we go just you should know that the first private space craft there it is a symbol of all of the last offer that i assess our country is broke it can no longer fund nasa or not to the extent it once did so there is privatization taking off before your eyes will that you with that symbol. well

a little i won't go there won't touch it let it go dimitri let that beautiful image carry us out that's all we have time for thanks so much for watching and please make sure to come back tomorrow in the meantime you can follow me on twitter at lauren lyster and give us feedback on the show or catch any of the shows you missed at youtube dot com slash capital account and from everyone here thanks for watching and have a great night.