When you make trading of financial instruments open and competitive, it becomes less profitable for dealers and banks. This happened in 1975 with stock broking and in 2002 with corporate bond trading, and in both cases broker-dealers lost billions of dollars as aggressive price cutters entered the market and commissions shrunk. It was good news for buyers and sellers, but bad news for banks.

So what about derivatives trading, the biggest and most profitable market by far on Wall Street? You will be unsurprised to learn that big banks have never been keen on the prospect of putting derivatives trading into a clearinghouse and requiring that prices be made public. They much prefer the current system, in which a small number of banks control the entire market and neither buyers nor sellers have any idea exactly what commissions they're paying when they puchase derivative contracts.

Sadly for the big banks, the Dodd-Frank bill mandates the end of this cozy relationship. But legislation is one thing and reality is quite another. In fact, if you have a good memory you'll remember a post earlier this year, before Dodd-Frank was passed, in which Bob Litan warned (in my paraphrase) "that even if we pass regulatory reform, the dealer-banks that currently control the market in OTC derivatives have a ton of incentive to slow-walk anything that creates genuine transparency."

Well, guess what? He was right! Dodd-Frank may mandate exchange trading and transparency for derivatives, but who's going to run those exchanges? Big banks, of course. In the New York Times today, Louise Story tells us what this means:

On the third Wednesday of every month, the nine members of an elite Wall Street society gather in Midtown Manhattan. The men share a common goal: to protect the interests of big banks in the vast market for derivatives, one of the most profitable — and controversial — fields in finance. They also share a common secret: The details of their meetings, even their identities, have been strictly confidential.

....The banks in this group, which is affiliated with a new derivatives clearinghouse, have fought to block other banks from entering the market, and they are also trying to thwart efforts to make full information on prices and fees freely available.

....Bank of New York Mellon has been trying to become a so-called clearing member since early this year. But three of the four main clearinghouses told the bank that its derivatives operation has too little capital, and thus potentially poses too much risk to the overall market. The bank dismisses that explanation as absurd. “We are not a nobody,” said Sanjay Kannambadi, chief executive of BNY Mellon Clearing, a subsidiary created to get into the business....The real reason the bank is being shut out, he said, is that rivals want to preserve their profit margins, and they are the ones who helped write the membership rules.

....Critics have called these banks the “derivatives dealers club,” and they warn that the club is unlikely to give up ground easily. “The revenue these dealers make on derivatives is very large and so the incentive they have to protect those revenues is extremely large,” said Darrell Duffie, a professor at the Graduate School of Business at Stanford University, who studied the derivatives market earlier this year with Federal Reserve researchers. “It will be hard for the dealers to keep their market share if everybody who can prove their creditworthiness is allowed into the clearinghouses. So they are making arguments that others shouldn’t be allowed in.”

Definitely read the whole thing, which has several more damning details. Banks can talk all they want about capital requirements and governance structures, but if they're unwilling even to admit publicly who runs their clearinghouses, it's pretty obvious their primary interest is focused on keeping the derivatives club very, very small and very, very private. In other words: no aggressive competition needed here, thankyouverymuch. Big commissions and big bonuses will remain the order of the day.

Unless, of course, regulators take a tough line and force banks to genuinely open up derivatives trading. What do you think are the odds?

Christopher Caldwell has a cover essay in the current issue of the Weekly Standard about the economic havoc being wreaked in Europe thanks to the straitjacket that the euro has put them in. It's an interesting read, though I don't agree with everything he says. But I'm curious about this sentence, from a review of the piece by Kenneth Anderson:

Toward the end, the essay points out that although Greece is every bit as corrupt and profligate as the newspapers suggest, that was not the case with [] Ireland, certainly not in the sense of Greece.

This is a common attitude, but I'm not sure any of us should buy it. Granted, Greek corruption is depressingly crude, conspicuous, and grasping, sort of like being mugged in a dark alley or shaken down by a wise guy. By contrast, Irish corruption, much like its U.S. counterpart, is rather more genteel, discreet, and white collar than the Greek variety. For this reason, it's usually treated as mere "cronyism" — regrettable, perhaps, but not truly corrupt "in the sense of Greece."

On the other hand, the U.S./Irish version is actually far more efficient at separating the yokels from their money. In any meaningful sense, then, shouldn't it be considered more corrupt? The fact that the theft is mostly legal and barely even noticeable may make it more respectable, but it hardly makes it more honorable.

Over at Lawfare, former OLC head Jack Goldsmith has a very nice, compact summary of what I think are the main points in the great WikiLeaks controversy. In particular, even for those who take a dimmer view of WikiLeaks and its founder than Goldsmith does, I really think a lot of people aren't thinking hard enough about his fourth point:

Whatever one thinks of what Assange is doing, the flailing U.S. government reaction has been self-defeating. It cannot stop the publication of the documents that have already leaked out, and it should stop trying, for doing so makes the United States look very weak and gives the documents a greater significance than they deserve. It is also weak and pointless to prevent U.S. officials from viewing the wikileaks documents that the rest of the world can easily see. Also, I think trying to prosecute Assange under the Espionage Act would be a mistake. The prosecution could fail for any number of reasons (no legal violation, extradition impossible, First Amendment). Trying but failing to put Assange in jail is worse than not trying at all. And succeeding will harm First Amendment press protections, make a martyr of Assange, and invite further chaotic Internet attacks. The best thing to do — I realize that this is politically impossible — would be to ignore Assange and fix the secrecy system so this does not happen again.

The whole thing is worth a quick read.

UPDATE: Here's the Guardian on U.S. attempts to take down WikiLeaks:

Attempts to railroad WikiLeaks off the net quickly failed. Removing its hosting servers has increased WikiLeaks' ability to stay online. More than 1,300 volunteer "mirror" sites, including the French newspaper Libération, have already surfaced to store the classified cables. Within days the WikiLeaks web content had spread across so many enclaves of the internet it was immune to attack by any single legal authority. In some respects, WikiLeaks has never been safer or as aggressively defended.

Italics mine. The rest of the piece is a look at the hacker community that's defending WikiLeaks, and it's interesting throughout.

Silver Nitrate Bleg

A few days ago I went into the doctor to get a skin tag cut off (it was blocking my peripheral vision and annoying me). And cut it off he did. But first, he told a nearby nurse to get a silver nitrate stick in case there was bleeding. And there was bleeding, so the stick was duly applied.

Anyway, as this was happening I was thinking "Hmmm. Silver nitrate. I think I remember that from high school chemistry with Mr. Lantz. Stains the skin really badly and absolutely nothing gets it off, right?" Yes indeed. Stains it jet black, and as you can see above, the central spot where my skin was snipped is still jet black three days after it was applied. So my question is: just how long does it take until this stuff wears off? Any chemistry mavens around who either know or remember?

Just got this direct tweet from one of MoJo's editors:

Hey Kevin, you want to tweet/blog link to Kate's Cancun wrap up?

Seriously? The Cancun climate talks? You're trying to tell me that I shouldn't have completely tuned them out weeks ago? That something actually happened there? Seriously? OK then. Let's see what Kate Sheppard has to say:

Broadly, the agreement accomplishes most of what observers hoped it would heading in two weeks ago: It records the commitments to cut greenhouse gas emissions that developed and developing countries made in Copenhagen, establishes a framework for transparency, sets up a global climate fund with the goal of providing $100 billion in financing to developing countries by 2020, and establishes an initiative aimed at curbing deforestation.

Um, what? Actual progress? Granted, it was fairly modest progress, and apparently a decision to extend the binding Kyoto limits on greenhouse gas emissions was kicked down the road another year. As Sivan Kartha, a senior scientist with the Stockholm Environment Institute in Boston, says, it's not clear whether that one-year delay on a decision will serve as "a lifeline or a noose" for Kyoto.

Still, read the whole thing. I've been in such a deep funk over climate change for the past six months that I've barely paid any attention to it at all. I have a feeling I'm not the only one. But Kate quotes EU commissioner for climate action Connie Hedegaard, who says last year's failure at Copenhagen might have opened a few eyes. "The major difference is that people this year realized if we didn't get a result here the process risked dying," she said. "Basically it was the political will that changed."

On Thursday, Republicans filibustered a bill to create a $7 billion fund for 9/11 first responders who are experiencing health problems as a result of their work. Eric Boehlert is unhappy with the press coverage:

The fact that the 9/11-related legislation was defeated was news. Period. The fact that it was defeated as part of the larger Republican strategy to tie the Senate in knots made yesterday's vote even more newsworthy. But not at ABC, CBS or NBC. Last night, all three evening newscasts failed to report on the fact that Republicans had voted down a previously bipartisan bill designed to provide medical coverage for Sept. 11 emergency workers. At the major networks, that development was not considered newsworthy.

This is a pretty good demonstration of the difference between the liberal and conservative media machines. The reason the networks didn't bother reporting this is because everyone knew from the start that Republicans weren't going to vote for the 9/11 bill before the tax deal had cleared the Senate, so bringing it up for a vote was just political theater. And the evening newscasts don't generally cover that kind of stuff.

So why do they often cover it when the shoe is on the other foot? Because conservatives have the ability to turn political theater into real news. Once the Rush/Drudge/Fox machine gets rolling, there's genuine outrage all over the country. And that's what eventually gets reported.

For better or worse, liberals don't have this. In the case of the 9/11 bill, there was no ginned up outrage around the country, no tea party rallies, no congressional switchboard meltdowns, no sense that wow, people are really upset about this. The basic news may be the same when both sides do this, but the megaphone is completely different.

Please Be On Time

Matt Yglesias likes the Germanic devotion to punctuality:

I find the American thing where you’re supposed to show up late for everything but exactly how late depends on the precise details of the situation to be incredibly stressful. I’m really compulsive about time in a way that most people I know find very annoying. Germans (and Swiss) have this right. Pick a time and stick to it!

I agree. But it can bite you in the ass, too. I remember one time a few years ago, back when I still worked for a living, doing a roadshow thing in Europe for a couple of weeks. It was the same deal in every city: two or three PowerPoint presentations about the greatness of our product line and then everyone goes home. In Zurich, though, I never even got to finish. The invitations had said that we were going from — well, I don't remember. But something like 10 am to 11:30. And that day we were running a little late. Maybe ten minutes or so, no big deal. Or so I thought. I was last to speak, and at 11:30 the room practically started seething. Not just a bit of fidgeting or some discreet looking at watches, but loud and definite notebook closing and chair moving, people standing up and congregating around the door, etc. It was all so obvious that I just gave up, skipped to the last slide, and thanked everyone for showing up. The crowd practically bowled me over getting to the door.

I asked about this afterward and our host told me it wasn't unusual at all. In Switzerland, if you say you're going to finish at 11:30, then by God they expect you to be done at 11:30. And woe betide you if you think your presentation is so fascinating that you can get away with a few extra minutes. You can't.

Anyway, consider this a friendly warning about cultural differences if you ever have to speak in Switzerland. There's a reason that people talk about things running with the precision of a Swiss watch.

The long arm of the law has caught up with me. After an excessive amount of turkey caused me to forget about my jury duty assignment last month, I'm now assigned to a jury pool for the week before Christmas. Hopefully judges and lawyers don't really want to work very much that week, so demand for jurors will be small.

And what does that have to do with catblogging? Nothing, really. But what do you think of Inkblot and Domino as potential jurors? They look like hanging judges in this rare picture of them sharing the same snoozing space without growling at each other. Usually Inkblot chases Domino away if he wants whatever spot she's sleeping in. Then, to add insult to injury, he wanders off because he didn't really want it after all. He just didn't want her to have it. This attitude is normally called "dog in the manger," but perhaps it should really be called "cat in the manger"?

And here's a contest: can you figure out where this picture has been photoshopped? There are no prizes for winning, just the warm glow of knowing that you have a keen eye for crude digital manipulation.

Is Cash King?

Jamelle Bouie writes about the social safety net:

If I were designing a welfare system from scratch, it would completely dispense with vouchers and stamps, and basically be a system of direct cash transfers to the poor and working-class, in the form of a negative income tax or some other method. As far as I can tell, food stamps, tax credits and unemployment insurance aren't efficient as much as they are ways to compensate for our country's long-standing ethnic and racial suspicion. In other words, restricting government assistance to a category is a way of keeping "those people" from spending your money on needless luxuries.

I haven't given the structure of welfare payments any serious thought, so don't take this as some kind of Olympian pronouncement. But if we did this, how big do you think those direct cash transfers would be? Bigger than EITC + Section 8 + food stamps + TANF + Medicaid? It's not a perfect comparison since not everyone with a low income qualifies for all those programs, but it's still a comparison worth thinking about. I don't think there's any question that social welfare programs are usually set up to ensure that public money isn't spent on things that the public doesn't want its money spent on, but (a) that's probably inevitable and (b) the poor might end up better off with a laundry list of in-kind programs than with a straight check every month. The generosity of the American taxpayer is not exactly legendary, after all.

Anyway, I'm not saying I disagree here. There are probably advantages to flat cash payments. But it's questionable whether this would end up being a boon for the poor.

From DealBook:

A decade ago, a former Treasury secretary, Robert E. Rubin, left the Clinton administration to become a senior adviser and board member at Citigroup — collecting a $10 million a year paycheck with no management responsibility. On Thursday, Peter R. Orszag, President Obama’s first budget director and a protégé of Mr. Rubin, followed in his mentor’s footsteps and joined Citi’s investment banking group as a vice chairman.

....Inside Citigroup, the guessing games have already begun about how many zeros will appear on his paycheck — as well as the requisite jokes about whether his package would pass muster with the federal pay czar. Such a job typically pays at least $2 million to $3 million, according to bankers.

This is excellent news. I'm sure Orszag will use his position to rein in Citi's behavior and try to make them a more public spirited enterprise. Right?