Schapiro spent two years working on a plan to prevent a repeat of what happened in 2008, when the money-market industry ground to a halt. Holdings of Lehman debt caused the $62.5 billion Reserve Primary fund to “break the buck,” its share price dropping under $1, which triggered a wider run.
Purple Ads
The plan, requiring the funds to hold extra capital or abandon their fixed $1 share price, sparked a fierce reaction. The U.S. Chamber of Commerce blanketed the subway station near the agency’s Washington headquarters with orange and purple ads warning against the change. Schapiro canceled a vote after a commissioner who met 11 times with fund companies and their supporters told her that he changed his mind.
The latest compromise, offered by Schapiro successor Mary Jo White, doesn’t eliminate all $1 share prices. That leaves the funds vulnerable, the University of Chicago’s Kashyap said.
Banks also stymied government efforts to rein in the largely unregulated $633 trillion derivatives business. They carved out exemptions to Dodd-Frank rules that transactions go through central clearinghouses, which would force even the biggest dealers to post collateral. The exemptions, including one for currency swaps, could cover as much as 80 percent of the market, according to data compiled by Bloomberg.
Getting Gensler
A lobbying campaign by banks and foreign governments headed off an attempt by Commodity Futures Trading Commission Chairman Gary Gensler to extend the agency’s reach to derivatives deals overseas. Before it collapsed in 2008, leading to a $182 billion U.S. government bailout, AIG ran its credit-default swaps business out of London, helping banks move risk off their books. Under pressure from Treasury Secretary Jacob Lew, Gensler agreed in July to accept European Union jurisdiction.
“At a point where politically you would think that the big banks are at their weakest, still they have had an enormous amount of influence,” said David Skeel, a University of Pennsylvania law professor. “There was no serious effort to neutralize the big banks. They were seen much more as partners than as problems.”
Wall Street firms also resisted limits on how much business they can do with one another. The Fed, seeking to reduce the chance that one failing company would topple others, proposed in December 2011 to cap how much counterparty credit risk a bank could have with any systemically important trading partner at 10 percent of regulatory capital.
Goldman’s Warning