Good afternoon. I’d like to thank the American Bar Association’s Committee on Derivatives and Futures Law for inviting me to speak today. Thank you, Susan, for that introduction.
As we gather here in South Florida, one doesn’t have to travel far to see what happened to America as a result of the 2008 financial crisis. Three years later, foreclosures remain rampant in Florida neighborhoods, and the state still faces unemployment of nearly 10 percent. When I was with you two years ago, I had just visited some friends in Immokalee, Florida’s largest farm working community. I can tell you that these farmers who pick and package tomatoes are still feeling the effects of the economic downturn, as are so many other Americans. The 2008 crisis led to eight million jobs lost and millions of families losing their homes.
It’s the real economy – the non-financial side – that provides most Americans with jobs. Between 2007 and 2010, the real economy supplied 94 percent of full and part-time private sector jobs, according to the U.S. Bureau of Economic Analysis.
The financial system has an important role to play as well. It helps to allocate capital and risk throughout the economy, as well as to provide a place to save and invest. Each part of our economy relies on a well-functioning derivatives marketplace. This market is essential so that producers, merchants and other end-users can manage their risks. At approximately $300 trillion, the domestic swaps market represents more than $20 of swaps for every dollar of goods and services produced in the U.S. economy. And it is important for the public to have confidence in the integrity of these markets.
As important as the financial sector is, however, at times, it hurts the real economy. In 2008, the financial system and the financial regulatory system failed America. And though the financial sector plays a critical role, it is the real economy that is the true engine of economic recovery.
While the crisis had many causes, it is clear that swaps played a central role. The swaps market helped build up risk in the financial system that spilled over into the real economy, affecting businesses and consumers across America. And let me ask, how many of those millions of people who lost their jobs or homes do you think ever heard of swaps, let alone ever used one?
The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) was the President and Congress’ response to the financial crisis. Two very important goals were to bring transparency and competition to the swaps market and to prevent risks in the financial sector from again so infecting the real economy.
Why does the Dodd-Frank Act really matter? And to whom does it matter?
Dodd-Frank matters as it brings transparency and competition and lowers the risk of the swaps market to the real economy. It matters as well to users of derivatives within the financial sector, also called the buy side.
The swaps market, given its current lack of transparency, could aptly be called the largest dark pool in our financial markets. Bringing greater transparency and competition to the swaps market is about lowering costs for companies and their customers.
Companies – in the real economy – can lock in the price of products they’re selling or buying or a rate they paying, thus lowering their risk. This allows businesses to focus on what they do best – job creation and economic investment.
Segments of the financial sector – the buy side – also benefit from greater transparency and competition in the swaps market. Whether it’s pension funds, mutual funds, community banks or insurance companies, they all will benefit from the lower costs and greater pricing information that would come from a more transparent and competitive swaps market.
Almost every part of our economy benefits from Dodd-Frank reform – with the possible exception of some of your clients, as some of the information advantage they may now have shifts to the broader public.
Dodd-Frank reform also matters because it will lower the risks that Wall Street, from time to time, poses to the rest of us. Standardized swaps will be moved into central clearing, lowering the risk of an interconnected swaps market. And for the first time, dealers will be comprehensively regulated for their swaps activities.