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Reviews:
 ·magicjack.com
2 edits | reply to hoyleysox
Re: Unemployment and Wall Street said by hoyleysox:In what form do you think 'transparency' should be implemented? Maybe levels of regulation:
1. All derivatives go through an exchange (clearing house, like futures contracts and put/call options do today).
At least then there would be some standardization and reporting about short interest in various things (interest rates, mortgage and consumer-debt defaults, etc.). At least regulators would have real-time access to who is exposed the most, both as a counterparty and underwriter (who might not meet obligations as conditions worsen).
That was part of the problem during the last meltdown. Really smart people like Paulson and Bernanke had no knowledge of just how deep the derivative market ran, or how interconnected everyone was.
To me, that was one of the most remarkable aspects of the meltdown. Sub-prime mortgages were just 20% of the total mortgage market. Just months before the meltdown Bernanke told Congress they posed no significant threat to the economy. He didn't realize how leveraged they were, and how bank books were cooked with Credit Default Swaps to make it look like there was no risk. He didn't know who had committed to pay defaults, or if anyone could.
The exchange could create indexes representing categories of derivative volume, volatility, current leveraged nature of underwriters (reflecting deteriorating conditions). Perhaps report real-time leverage levels of underwriters.
Using those indexes, the exchange could reflect deteriorating conditions of underwriters. In the same way futures exchanges settle contracts every day depending on current value of future contracts.
At least that kind of visibility of the market (participants, level of participation, trends, and health) would be step forward.
This level of regulation/transparency could lead to the commodities exchange enforcing margin calls (settlement) the same way they do with futures contracts. Counterparties have to settle the difference every day, depending on the direction of the contract. The exchange acts as an ongoing "escrow" account until expiration date, with funds continually deposited to meet the direction of the contract.
2. Corporations (publicly traded, thus voluntarily subjecting themselves to regulation and transparency) should be required to disclose more about the positions they hold, who their underwriters are, etc.
Investors in a corporation would know how exposed a corporation is to market conditions.
3. Banks (even more regulated for transparency and trust than publicly-traded corporations). Perhaps limited to participate in derivative contracts that meet certain regulatory requirements. That would feed back to #1, using the tools created there.
4. Hedge funds (unregulated). I'm ok with people operating outside the exchange. But, I don't believe hedge funds should be counterparties to those who are (should be) operating on the exchange (with more visibility, regulation).
That was part of the problem during the meltdown. Hedge funds underwrote derivative contracts (swaps). They had absolutely no concern about whether they could pay off. To them, it was all upside. They could collect premiums. But, if the world blew up, all they could lose was the capital in the fund (which would probably be gone anyway, as a result of such market conditions).
Hedge funds should be able to write things like that with you or me, private businesses, etc. But, I think banks should be prohibited from counter-partying with a hedge fund (who wants total anonymity) the way they did prior to the meltdown (and may be doing now).
Those are my thoughts. There should be a way to improve this highly-speculative market the same way we did individual stock-trading, futures, options, etc. Just because it won't be perfect shouldn't outweigh what is a huge potential to bring stability and predictability (integrity as opposed to corruption) to a market.
At least a stated attempt to achieve those goals. That's what's astounding. We've accepted that corruption (and the profits it can bring until it blows up) is better. There should be a way to balance the benefit of creativity in the market (developing new products and services) and the visibility of how that creativity is performing.
Mark | |
| I think that the clearinghouse exchange is a good idea if it is implemented properly. I could see the exchange concentrating risk though. Lehman sort of acted like that clearinghouse and when it went under, the only people directly were those that used Lehman as an intermediary or counterparty, the trouble was that so many people did. This exchange should just be a broker and not have any 'skin' in the game like Lehman did.
I totally agree with your goal of transparency in the sense that it should increase investor confidence in company's books. It is frustrating that companies can use derivatives to play tricks with their balance sheets, that is deception. | | |
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Reviews:
·magicjack.com
| said by hoyleysox:This exchange should just be a broker and not have any 'skin' in the game like Lehman did. I was talking about an exchange like CBOT. An exchange like the NYSE and NASDAQ, but they clear futures and stock options. Regulated by the CFTC.
It's not like a private exchange, which more institutions than Lehman engaged in. What you're worried about is the kind of exchange we have today with non-regulation. Investment banks and hedge funds operating their own exchange, using their book.
Mark | |
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