The New York Times
By STEPHEN LABATON
October 15, 2009
WASHINGTON — A key House committee voted on Thursday to regulate, for the first time, trading in the arcane financial instruments known as derivatives, which have been linked to the financial crisis that shocked Wall Street and cut into the savings of millions of Americans.
The 43-to-26 vote by the Financial Services Committee was mostly along party lines and was a big step in President Obama’s proposed overhaul of rules covering the nation’s financial system.
The measure is part of a bill that will be debated by the House and Senate. Michael S. Barr, the assistant Treasury secretary for financial institutions, called the bill “absolutely essential to preserving a strong marketplace.” …
http://www.nytimes.com/2009/10/16/business/16regulate.html?_r=1&hp
Market Reform’s Effect on Derivatives: No more “weapons of financial mass destruction”?
Converanet.com
August 05, 2009
Warren Buffett called them “weapons of financial mass destruction” and they have been heavily blamed for the meltdown in the financial system and the freezing of credit markets over the past 2 years. Financial derivatives represent trillions of dollars in securities that trade hands around the world every single day. Yet they are one of the least understood financial instruments.
Derivatives can be traced back more than 200 years, when rice farmers in Japan would sell their crops at a set price today, promising to deliver those crops when they were harvested at a later date. The price was based on what the buyer and seller “guessed” that the price would be a few months down the road. Derivatives started out then as an innocent, simple financial tool for those involved in the buying and selling of commodities. A derivative is simply a financial contract with a value derived from the underlying value of some good or commodity.
Fast forward to the late 1990s and derivatives had transformed into much more complicated vehicles. The commodities involved in many derivative contracts were no longer just rice and beans, but rather interest rates, mortgages, and other financial assets with no intrinsic value. Credit derivatives, for example, are a tool used to shift risk from one financial institution to another. As soon as the housing market started to decline and foreclosures started to increase, the mortgages in these contracts became what we now call “toxic debt.”
The biggest problem with financial derivatives was a serious lack of regulation. Ten years ago, legislation allowed for derivatives to be traded over-the-counter with no regulation. The thinking was that the commodities markets were already regulated, so there was no need for an extra layer of regulation when derivatives were made up of commodities. Soon, banks were packaging sub-prime loans into contracts along with traditional, safer mortgage-backed securities, but it was impossible to determine where the bad loans were once they were packaged and traded. Banks with billions of dollars worth of credit default swaps and other financial derivatives were stuck holding securities that were impossible to determine a value for. …
The neocons produced a recipe for disaster – (1) tightly control labor while (2) deregulating the financial industry. There you have, at work, two of the four main steps of VOODOO economics.
And todays neocons, now calling themselves conservative Republicans, still do not seem to have learned from America’s crashed economy. Is that type of behavior the reason for the word “IN-DENIAL” as a description of some neocon behavior?
Will Rogers said something like, “when you realize you’re in a hole stop digging”. That should be sage advice – but apparently, sometimes it is not.
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Tags: derivatives, financial crisis, meltdown, president obama, regulate, warren buffett, weapons of financial mass destruction
