Blowing A Hole In Dodd-Frank: Newly Public Data Shows Fed's Bail-Out Of Forex Market Topped $5.4 Trillion

Secretary Timothy Geithner will soon make a monumental decision: whether to allow the $4 trillion foreign exchange derivatives market to keep operating in the shadows, or adhere to Dodd-Frank rules for transparency, oversight and accountability.

At The American Prospect, Robert Kuttner writes on previously confidential data analyzed by the public-interest group Better Markets -- and made available by the Sanders Amendment -- showing that the Fed had to bail out the foreign exchange market with more than $2.9 trillion in lending in October 2008 alone and $5.4 trillion in the three months after the fall of Lehman Brothers. The Fed's peak injection of dollars on any one day occurred on Oct. 22, 2008, when it reached $823 billion, according to the Better Markets' analysis.

Despite this record, Sec. Geithner has signaled that he may not apply Dodd-Frank rules to foreign exchange swaps and forwards.

Such an exemption is opposed by a top member of Obama's economic team and many Hill Democrats. Additionally, the foreign exchange market has been in the news lately for numerous questionable practices, with major hedge funds like Blackrock and state pension funds arguing that they have been overcharged for foreign currency trades.

"In short, far from these derivatives markets working 'quite well,' as Geithner asserted, they required massive support by the world's central banks, and by the Federal Reserve in particular," Kuttner wrote. "Indeed, it was Geithner himself, in his former job as president of the New York Federal Reserve, who was responsible for the $5.4 trillion Fed rescue operation -- without which foreign-exchange markets would have collapsed."

"Yet Geithner's draft of what became the Dodd-Frank Act, sent by the Treasury to Congress in August 2009, excluded foreign-currency swaps from the derivatives reforms. The final House and Senate versions of the bill did cover foreign-currency derivatives, however. But as a result of extensive lobbying by Geithner and the financial industry, the final law contained a sleeper provision allowing an exemption if the Treasury secretary issues a finding that foreign-exchange derivatives should be exempted in the public interest."

Better Markets President Dennis Kelleher wrote, "The data refute the claim that the foreign-exchange markets performed well during the financial crisis and thus should be exempt from regulation."

To speak with either Robert Kuttner or Better Markets President Dennis Kelleher see contact information above.