The money quote: “Wall Street thrives and makes money in inefficient markets”. Or in plain English if they put all the cards on the table and made full, complete and fair disclosure as there supposed to do they couldn’t make so much money as their marks/customers would realize that they are being taken for a ride…..
The proposals championed by Mr. Gensler, if adopted by Congress, would substantially alter what is now a largely unregulated market in over-the-counter derivatives, financial instruments used by companies and investors to protect themselves and bet on moves in variables, like interest rates or currencies, and to speculate.
“The question is how much is legitimate hedging by corporations” as opposed to speculative trading, said Don M. Chance, a finance professor at Louisiana State University. “You have to be careful you don’t punish companies that want to use swaps in a productive, safe manner.”
“Wall Street’s interest is not always the same as the public’s interest,” he says now. “Wall Street thrives and makes money in inefficient markets, and I am creating efficiencies in the market.”
The Commodity Futures Modernization Act of 2000, backed by the likes of Mr. Rubin, sidelined the trading commission even more than before. If Congress agrees to reverse many of the measures contained in that law, Mr. Gensler says he intends to rebuild the commission by increasing its staff to about 1,000, from 600 today, and by increasing the computing power at its disposal to try to keep up with Wall Street’s traders.
“I disagree with anyone who says derivatives did not play a part in the crisis,” he said in defense of more oversight. He added: “Like San Francisco after the earthquake, we had a calamity, and now we need building codes.”
Consider for example these characteristics of most financial instruments:
-They trade on an exchange;
-Participants have sufficient capital to engage in trading;
-Counter-parties disclosure is known (at the least to the exchange)
-Potential future payments require capital reserves to meet obligations;
-The full amount of traded instruments is transparently disclosed;
-There is a regulator in charge of insuring the above rules are followed.
Derivatives had none of those. Indeed, the CFMA specifically exempted derivatives not only from these items, but added they were exempt from state insurance regulators.
Let’s not over-complicate this: We need to do 3 things to rein in the worst aspects of derivatives, and dramatically reduce the systemic risk they present, while retaining their ability to be a valid financial instrument for hedging risk:
1. Repeal the Commodity Futures Act of 2000
2. Treat Derivatives like all other financial instruments: All of the above elements need to be derivative requirements;
3. Give the Commodity Futures Trading Commission full oversight and the teeth to enforce the rules.
Wall Street and the banks will fight this tooth and nail, as they are reaping billions in derivative trading profits. Never mind that whole 2008-09 meltdown thingie — that’s ancient history.
Source: Graham Bowley | New York Times
Goldman Deal-Maker Now Advocates Regulation
Published: March 10, 2010
and
Barry Ritholz | The Big Picture
Time to Regulate Derivatives (like every other financial instrument)
