Finance Self Regulation

The World Finance industry and especially the Wall Street Branch has  been able to fend off most monitoring and regulation under the guise that a)financial institutions and markets are Darwinian effective –  as long as they remain unfettered by regulations, financial markets will be transparent and efficient at reaching very risk balanced valuations of any business, commodity, stock or other financial bet; and b)because they are so efficient markets tend to regulate themselves because they eliminate the poor or bad players in their midst.

Meanwhile Wall Street is spawning new commodity, derivative, and swaps markets at an ever spiraling rate. And the people watching the stock and financial markets in the SEC, Treasury Secretary, and Fed Chairman posts have tended to be sympathetic to this “no need to regulate” point of view. Our previous post looked at such advocacy by former Fed Chairman Alan Greenspan.

What this post will raise is the idea that a)self regulation by financial players has been virtually non-existent or woefully short of the mark. To support the latter point, consider the August 1 2008 issue, page C12, of the Wall Street Journal. Here is the promise by Credit Default Swap traders –  “they will put in place a central clearing house for ‘some’ credit-derivative trading in place by the year end”.

Now CDS-Credit Default Swaps have grown in 5 years by a factor of 25 times in size to a $50Trillion++ dollar market. A very lucrative market. But also  a very secretive market as well. In fact that is one of the causes of the current market meltdown. Nobody can determine who has what toxic CDS and how toxic they are. So banks and financial institutions are loath to do business with each other because they are afraid their next door neighbor may be too highly leveraged and exposed to substantial capital losses with their CDS  and other bad mortgage/debt exposures. So turn off the spigots. This point of view is further exacerbated by the fact that so much bad debt got spread though the financial system by badly valued (Moodys, S+P, Fitch,  and other valuation firms take a bow here) swaps, CDS and other securitized debt.

Given that CDS are ground zero for the current financial meltdown, one would think that the CDS and swap dealers would want to put up a comprehensive and foolproof system. But as the WSJ points out they don’t. It would a)be subject to many exceptions and non-compliant freeloaders, and b) it would open the market up to the very competitive thrusts and Darwinian efficiencies the finacial markets say they deliver with such efficiency. Oops- maybe financial markets are efficient in the own very sweet time.

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