by Bill Kavanagh: Anyone who has spent time trying to understand the financial meltdown of 2008 has learned about derivatives and credit default swaps. What the general public probably hasn't learned is that nothing has happened since the markets went haywire to make the complicated and opaque derivatives market safer. No new regulatory legislation has passed and the legislation that has been introduced has loopholes big enough to burst a bubble in.
Today's NY Times editorial sheds some additional light on why derivatives need to be regulated and how the financial lobby has worked to prevent effective regulation from getting in the way of their lucrative— and unsafe— market in exotic products:
A big part of the problem is that derivatives are traded as private one-on-one contracts. That means big profits for banks since clients can’t compare offerings. Private markets also lack the rules that prevail in regulated markets — like capital requirements, record keeping and disclosure — that are essential for regulators and investors to monitor and control risk...
The big banks claim that derivatives are used to hedge risk, not for excessive speculation. The best way to monitor that claim is to execute the transactions on fully regulated exchanges, pass rules and laws to ensure stability, and appoint and empower regulators with independence and good judgment to enforce compliance.
Without effective reform, the derivative-driven financial crisis in the United States that exploded in 2008, and the Greek debt crisis, circa 2010, will be mere way stations on the road to greater calamities.
(Kavanagh cross-posts at Bill's Big Diamond.)