Feds miss the mark on bank regulation

The derivatives market poses the most fundamental risk, so disallowing banks from commodity trading seems punitive.

By Jim Cramer Jul 23, 2013 9:42AM

thestreet logoBank sign © John Foxx, Stockbyte, Getty ImagesWhat do the regulators really want banks to be doing? From the looks of things, it just wants them to be banking!


Just this week we learned about how the Federal Reserve is looking in to the ability of banks to stockpile and trade physical commodities. So is the Commodities Futures Trading Commission, according to today's New York Times. That comes on top of last week's story about how the Federal Energy Regulatory Commission is fining JPMorgan Chase (JPM) for energy trading.


Notice I didn't say "illegal" energy trading, as I am not sure what is legal or illegal in energy trading. However, it's pretty sure that FERC is making it up as it goes along, something that is certainly within the bailiwick of a regulator. Concerning commodities trading and stockpiling by banks -- this business is, again, totally legal and no one is disputing it. Suddenly, though, the Federal Reserve has decided it might be too risky for banks to perform. That's unless the Fed just doesn't like it from the point of view of the consumer and is trying to kill it, though I doubt that theory holds much water.


In the meantime, the endless drive for banks to raise more capital has crimped earnings and created a bizarre world where a surfeit of capital is bad news for earnings, because there's no higher-yielding place to put the stuff.


So the regulators want the banks to raise capital, still, even at the cost of potential new loans -- because we can't have both at the same time. They want to discourage energy trading. They want to discourage -- or they wouldn't be looking at it -- commodity trading.


They just want banking.

Now, what's so ironic in all this is that there's an undercurrent here that anything can be justified in the name of "too big to fail." Any rules that cut back on anything risky can be justified as a way to cut down on the ability of banks to fail.


What's so amazing, though, is that none of these issues is at the core of what causes or has caused investment banks to fail. It's not commodities, or energy trading, that we need to worry about. It is the derivatives market that poses the most fundamental risk to banks, and it's there that the banks have fought tooth and nail to keep disclosure to a minimum, in part because that's where the money is. The less regulation, the more you can charge the customer and get away with it. Yet the book of derivatives has been instrumental in bringing down every bank that did fail, with the possible exception of the banks that did "low- and no-doc" and "no money down" mortgage lending.


I don't know what will come of all of this. I do think the banks trading energy will pull back from that market, because the fines are huge and the infractions seemingly totally legitimate. Who can possibly navigate those waters safely?


Can the Fed decide that a business it has blessed forever -- commodity trading -- suddenly be placed off-limits? That's almost a confiscation, for heaven's sake, as this has been a totally legitimate and up-and-up business for years and years for these companies.


Nonetheless, it shows regulators' powerful reach when it comes to banking. They can do whatever they want -- except to the derivatives markets, the one area that truly is responsible for the failure of banks that were too big. There they are toothless, and it is there that they need the real fangs. Everything else, to me, is just punishment for the past, not contingencies for the future. In other words, it's all punitive but not practical and, at this point in the game, I will take practical over punitive any day of the week.




Jim Cramer is a co-founder of TheStreet and contributes daily market commentary to the financial news network's sites. Follow his trades for Action Alerts PLUS, which Cramer co-manages as a charitable trust and is long JPM.




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Jul 23, 2013 9:54AM

it's all about the Benjamin's! 


when banks become too big to fail, they also have pleanty of cash to buy off whoever tries to control them. 


it's a wonderful leak in the dam that will never get plugged. 

Jul 23, 2013 10:19AM
With such a gray area between banks and the Guberment some controls should absolutely be in place.  I do believe publicly funded organization should be exempt from trading on a par with private firms or individuals.  We have already given banks way too much of an advantage over private citizens and firms.  I know how Corporations enjoy the easy profits when shooting fish in a barrell.  This entire free trade arrangement basically gives the Internationals a freeby over the in country manufacturers.  They have amassed trillions with little innovation.  The banks seem to want the same juice and one can't blame them for that.  You know free is a really good price.  If I could borrow unlimited funds at next to zero cost and minimal liability I could blow the shorts off any market competition.  We should have kept the banks out of the temptation for controlling commodities to start with. At best banks trading commodities is a gray area and at worst is completely unfair and perhaps illegal.  I have the same taste in my mouth for banks commodity trading as Politicians being able to openly trade on insider information. I would think the more we can do to put fairness and equity back into the markets the less suspicion and temptation for fraud and the better commitment we will get from investors knowing they can compete on a more level field.  JMHO
Jul 23, 2013 10:00AM

Instead of giving away free toasters they should give away free Vaseline.Those 1% CD`s

are just juicy.

Jul 23, 2013 11:49AM
If we just let the free market work, 99% of banking activity won't need to be regulated by any gov agency.  If banks make too many risky deals or bad bets, they'll go under.  If they rake customers over the coals, they'll go under.  If they make a bunch of bad loans without adequate collateral to people who can't afford to pay them back, they'll go under.   They will weed themselves out, if only we would let them.

If there's fraud or illegal activity taking place, go after them and prosecute to the fullest extent of the law.  But the safety nets we have in place now do nothing more than encourage risky, irresponsible behavior.
Jul 23, 2013 12:37PM

It's very obvious to this person, that Banks cannot work in a NON-regulated enviroment..

Think the "Bush Era" proved that point; It has also happened long before then and is happening now.

It has happened throughout History, even Ancient Times.


Yes "free markets" are fine, if not run by "crooks"

Vegas works real fine for all involved, correct ??

Even for the bus loads and plane loads, That "show up" to make their Fortunes".


Plenty of Banks have failed the last few years and "who has paid the tab." ???

Not all is covered by their FDIC contributions and then the time in Courts and Auditors,adjusters,etc.

Yeah, the crooked bastards should be in jail....Or executed, at least stripped of everything they have amassed...EVERYTHING. 

Jul 23, 2013 12:18PM

Steve....Think there are a few Banks around, but better yet Credit Unions; That are offering 1% or more slightly on CDs....Usually have mins. and are longer term 13-30 months..

Min. can start @ $1000, maybe lucky @ $500.


Credit Unions are a little more realistic with Members, then Banks are with Depositors..

Banksters are greedier and want $2500 or better and over 30 months.

There are CUs around that "just about anyone can join now", not just a workplace thing.

Ours started taking "outsiders" about a year or so ago..


Miss Lilly has some  getting 1-2%, most of the better ones have since rolled over to lower rates.

They were better, at 2-3%.

She has some for G-kids and GG-kids getting close to 2%, because they were put in at longer time periods, those mins were about $500-1000 each.

Good Luck...Check out a CU.

Jul 23, 2013 10:36AM
Having another case of nostalgia today.......... Baby Face Nelson we miss you.
Jul 23, 2013 1:03PM

Shouldn't Banks and Investment houses be totally different entities ??


**edited** For accept maybe guaranteed instruments or investments. 

Jul 23, 2013 7:33PM
We were hoping to get the S&P to positive territory but scumbags started selling at about 1530 hrs so, bad news....Flat to a bit down, cant complain much...Never ever trust manipulators, would be a gross mistake...Back to battle tomorrow.
Jul 23, 2013 10:59AM

AND....The great revelation today is: "Feds miss mark on Bank regulation."



"On the road again"....


Jul 23, 2013 10:17AM
Do not get too excited because the futures were up and we opened higher....Like we said yesterday after the close, manipulators will try to do their thing early today and they already started; S&P in the red already....Remember about futures, they become the past after 0930 hrs....Be cautious today, these scumbags are itching to bring us down big and there is no doubt they will, maybe not necessarily today, maybe so...More later.
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