June 15, 2010
– Comments (6) |
RELATED TICKERS: BAC
The proposal that banks create seperately capitalized entities for swaps trading appears to be gaining momentum.
The longer I dwell on this issue, the more I start to believe that this sort of move will be a mistake. In an ideal world, I'd like to bring back Glass-Steagall, but I'm starting to question whether that's possible, without destroying the competitiveness of American banks. It's not as if Europe is going to go along with us.
Volcker may be 'softening his opposition', but I still generally think that if Volcker believes a stringent regulation could have poor results, that it might not be very advisable. Volcker, of course, is not known for being 'warm' and 'fuzzy' to the big banks. If you have to convince him to favor this, maybe it's not well advised.
I'm questioning some of the stringent capital requirements, as well. I think the pendulum is starting to swing from the 'too lenient' side to the 'too restrictive' side. You can't fight a credit crisis by dramatically curtailing credit. Moreover, derivatives have their risks, but the risks have been sensationalized by the media. Most companies use derivatives for hedging purposes. Trying to overly regulate/restrict derivatives will actually increase risk; not reduce it.
I hope I'm wrong.
Article on Volcker's original opposition:
Disclosure: I am long on a few LEAPs on JPM.
Interesting Canadian banks still pay their dividend and make a boatload of money...
JakilaTheHun Huge catch 22..
Global Glass-Steagall would have my full suport
US Glass-Steagall will have them run to every foreign exchange...generating no exposure to risk and taxes to the homeland
They need to be put on an exchange for the whole world to see..then perhaps other countries will follow their led
Trying to overly regulate/restrict derivatives will actually increase risk; not reduce it. …really how? I can see a run at a weak counter partner but this is dominos
Moreover, derivatives have their risks, but the risks have been sensationalized by the media.
Strongly disagree and I am way more blunt then calling them exotic
How many terrorists would it take to blow up the financial market? Who does not understand Russian Roulette? You hit a bullet in the chamber and you blow out your brains...you hit a global defaulter and you blow out the world economy.. A 10 - 12 percent default in the regulated derivatives market is equal to the world's GDP...derivatives and their global leveraged counter-parties are the problem. If you believe the unregulated derivative market is 20-30 times world GDP...it would take a 1% defaulter.... The heart of the current crisis is the quadrillion plus derivative market that every government in the world is not wishing to regulate or even acknowledge the consequences of a defaulter.... The issue is not the total notional amount of risk.....but who is bearing it and why?
Perhaps the Al Qaeda-affiliated jihadists will be crawling out of their caves to head to the new derivative markets which are now open in the GCC capital markets.. Pick an enemy.....................as the every country market has one...
I am sizeably long BAC. Small position in GS LEAPs. Long enough insurers and BDCs to give Cramers "am I diversified" heart failure.
I hope this insane administration doesn't do anything too damaging to the markets and economy, for all our sakes.
If you believe the unregulated derivative market is 20-30 times world GDP...it would take a 1% defaulter....
People always cite that statistic, but it seems to show an ignorance of the nature of derivatives. It's based on the notional principle. Notional principle isn't a reasonable measure of risk; it's merely the size of the contract.
The vast, vast majority of derivatives are currency or interest rate related. One party pays out Dollars, for Euros or Yen --- or something along those lines. The transaction hedges risk for one party (or possibly both parties). It's very unlikely that the exchange rate would change so dramatically that one party would lose 100% of the contract value. Even 50% is unlikely. 25% would be rare.
But it's unlikely that most large multi-national corporations using these instruments would go bankrupt if one party defaults. They use them to hedge risk; e.g. maybe they have a fixed payment to make in two years in a certain currency - so they make a currency swap. Even if they "lost" on the contract, they still have the money to satisfy the obligation.
Moreover, large investment banks make contracts both ways (Euros for Dollars; Dollars for Euros), so even if a bank has $1 billion in currency swaps; their losses realistically are probably not going to be more than 1% of that. Even that would probably be rare. I'm no expert, so I can't give you actual percentages, but my guess is that very few of them are losing money on these types of instruments.
For a primer on derivatives, this article is pretty good:
10 Myths About Financial Derivatives
I don't agree with all of it, but the factual material within it is accurate.
Agree to disagree. Derivatives are the core issue of what is flawed in the financial structure of the global economy. I also believe this is the biggest security risk globally.
What I believe is the best mitigation technique that has never been on the table?
Personal Liability is the best mitigation technique.
I would love to hear just ONE convincing argument why personal liability isn’t the best risk mitigation technique.
There is no better check and balance than Personal Liability…yet corrupt congress in their thousands of hours of hearings and pages of rules never use this accountability tool.
It is not difficult to see this self regulating tool would provide a layer of capital from the boards management and highest paid employees
Agree to disagree. Derivatives are the core issue of what is flawed in the financial structure of the global economy. I also believe this is the biggest security risk globally.What I believe is the best mitigation technique that has never been on the table?Personal Liability is the best mitigation technique.I would love to hear just ONE convincing argument why personal liability isn’t the best risk mitigation technique.There is no better check and balance than Personal Liability…yet corrupt congress in their thousands of hours of hearings and pages of rules never use this accountability tool.Personal Liability1. proactive vs. reactive2. constrains risk taking3. reduces the need for government involvement4. allows for free market flow5. produces accountability6. concentrates the best interest by hanging personal financial loss over boards and managementIt is not difficult to see this self regulating tool would provide a layer of capital from the boards management and highest paid employees