ISDA Hires Rosen to Fight Obama OTC Derivatives Plan (Update1)
July 10 (Bloomberg) -- The derivatives market’s trade group retained Edward Rosen, a lobbyist with law firm Cleary Gottlieb Steen & Hamilton LLP, to water down the Obama administration’s plan to regulate over-the-counter securities.
Rosen’s hiring followed a disagreement among members of the International Swaps and Derivatives Association’s board that pitted Zurich-based Credit Suisse Group AG againstJPMorgan Chase & Co. of New York and seven of Wall Street’s biggest banks, four people familiar with the matter said.
Credit Suisse, whose representative is chairman of the group, recommended Rosen, who in 2000 lobbied for the Swiss bank in favor of a law that kept derivatives unregulated, said the people, who declined to be identified because the matter is private. The eight banks wanted to deploy lobbyists from the Securities Industry and Financial Markets Association, the individual banks and New York-based law firm Davis Polk & Wardwell LLP, they said.
“We are working with Ed,” Robert Pickel, chief executive officer of ISDA, said in an interview.
Rosen, 56, specializes in “structuring of complex securities and derivatives transactions” and regulation of those markets, Cleary Gottlieb’s Web site says. Based in New York, he “advises a broad range of market participants,” it says. Rosen, who referred questions about his hiring to ISDA, co-wrote “U.S. Regulation of the International Securities and Derivatives Markets, Ninth Edition,” published in 2008.
Among a ‘Handful’
Derivatives are contracts whose values are derived from assets including stocks, bonds, currencies and commodities, or events such as changes in interest rates and weather.
“Ed Rosen is one of a small handful of lawyers who have covered this over the years,” Pickel said in a separate interview before the decision was made. ISDA calls itself the world’s largest financial association with more than 830 members in 57 countries, according to its Web site.
A split in the ranks of ISDA may limit the group’s influence as Congress crafts legislation implementing President Barack Obama’s plan, said Kevin McPartland, a senior analyst in New York at Tabb Group, a financial research firm.
Instead of disagreeing, “the dealers need to come at this from every angle to make sure their story comes across” with a “common message at the highest levels,” McPartland said. “There’s obviously a lot of money at stake” and “so much misinformation about how this market operates,” he said.
President’s Plan
Investment banks have fought regulation of derivatives for more than a decade. Trading in the contracts provides as much as 40 percent of the profit for Goldman Sachs Group Inc. andMorgan Stanley, according to fixed-income research firm CreditSights Inc. JPMorgan made $5 billion in 2008 from trading in fixed- income derivatives, people familiar with its earnings said.
Obama’s plan to regulate the derivatives market, where contracts represent $592 trillion of underlying securities, is part of a wider overhaul of finance industry rules. The government wants to prevent any possibility of a repeat of last year, when the collapse of Lehman Brothers Holdings Inc. and American International Group Inc. in September froze credit markets and exacerbated the global recession.
Instead of dispersing risk, derivatives were “a major source of contagion through the financial sector during the crisis,” the Obama administration said in a report last month.
Geithner’s Testimony
U.S. Treasury Secretary Timothy Geithner is urging Congress to rein in the derivatives market with new laws that are “difficult to evade,” according to prepared testimony to be delivered today at a joint hearing of the House Agriculture and Financial Services committees in Washington.
Opaque financial products contributed to almost $1.5 trillion in writedowns and losses at the world’s biggest banks, brokers and insurers since the start of 2007, according to data compiled by Bloomberg.
“This lack of visibility magnified contagion as the crisis intensified, causing a very damaging wave of deleveraging and margin increases, and contributing to a general breakdown in credit markets,” Geithner said in his prepared remarks. Investors and corporations use derivatives to “evade regulation, or to exploit gaps and differences in regulation, and to minimize” taxes, he said.
ISDA has said it opposes an Obama proposal requiring that the most common and standard over-the-counter contracts trade on exchanges, which are regulated, and route through clearinghouses guaranteeing buyers and sellers against default.
Oxford, Columbia
While firms don’t want to trade on exchanges, they are willing to have standardized derivatives go through clearinghouses, Pickel said in congressional testimony earlier this year.
As recently as March banks were united in their lobbying and support of Rosen, a 1982 graduate of Columbia University School of Law who received an undergraduate degree from the University of Oxford’s Balliol College in 1975, according to his Cleary Gottlieb biography.
Credit Suisse and the eight banks hired Rosen in November to prepare for this year’s negotiations over regulation. The other eight are JPMorgan, New York-based Goldman Sachs, Bank of America Corp. in Charlotte, North Carolina, Barclays Plc of London, New York-based Citigroup Inc., Deutsche Bank AG in Frankfurt, Germany, UBS AG of Zurich and New York-based Morgan Stanley.
Prior Pay
They paid Rosen $430,000 to lobby members of Congress between October and March, lobbying records show. Officials at the banks, which are represented on ISDA’s 25-member board, declined to comment.
Rosen’s hiring in November was opposed by ISDA, which preferred waiting until Obama and the new Congress were sworn into office, the people said. Pickel declined to comment on the lobbyist’s work for the banks.
After retaining Rosen, the banks got some, though not all, of what they wanted in the Obama proposal.
One provision would require the largest non-banks in the derivatives market, including hedge funds, energy companies and other corporations that trade derivatives, to adhere to the same capital rules as banks as Rosen proposed.
The Obama plan went further than Rosen advocated in other areas, including the clearinghouse and exchange proposals for standardized contracts and requirements that all over-the- counter trades be reported to regulators.
Outlook for Effort
“I think Rosen would say success is getting part of what the banks wanted,” said Mark Williams, a finance professor at Boston University. “I can’t imagine them even getting 60 percent or 80 percent through” because the public blames banks for their role in the deepest credit crisis since the Great Depression, he said.
Credit Suisse’s co-head of public policy for the Americas, Mary Whalen, persuaded the banks to hire Rosen in 2008 and called ISDA officials last month to suggest the trade group employ the lobbyist, the people said. ISDA chairman Eraj Shirvani, a Credit Suisse managing director, was also in favor of hiring Rosen, they said.
Whalen and Shirvani declined to comment through Victoria Harmon, a Credit Suisse spokeswoman.
As CEO, Pickel has the authority to “employ and may terminate the employment of members of the staff necessary to carry on the work of the association,” according to the group’s by-laws.
Rosen worked for ISDA before. As recently as 2008’s third quarter he represented the group, working on amendments to the Commodity Exchange Act, lobbying records show.
To contact the reporter on this story: Matthew Leising in New York at mleising@bloomberg.net
To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net
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