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Regulating the Derivatives Market is Crucial to Our Economic Security

Submitted by on November 30, 2009 – 12:05 pm
  • Unregulated derivatives trading were a major cause of the economic crisis and loss of homes, jobs and retirement savings.
  • Inadequate regulation of derivatives was also a major contributor to last years energy price bubble.
  • The volume of derivatives trading is enormous.  According to the International Swaps and Derivatives Association (ISDA) survey, the outstanding amount of derivatives is over 454 trillion dollars at midyear 2009. This is more than 30 times U.S. GDP, and more than 8 times the size of the ‘ regular’ credit markets.  As long as derivatives are unregulated the bulk of our financial system is unregulated.
  • We cannot control systemic risk or prevent another crash without adequately regulating the derivatives market.  Secret, “untransparent,” and hugely undercapitalized derivatives transactions increase systemic risk, decrease the ability of regulators to intervene to protect the public in a crisis, and increase the likelihood that a challenge to one part of the economic system will result in credit freezes and crises across the whole system.
  • The 5 largest US swaps dealers control 95% of the US swaps market and are expected to earn 35 billion from the business this year.  These firms – the same ones that were the major beneficiaries of the taxpayer funded bailout: Citigroup, J.P. Morgan/Chase, Bank of America, Morgan Stanley and Goldman Sachs – have a huge vested interest in opposing derivatives reforms that will make the economy safer and more secure for everyone.
  • We can have a regulated derivatives market that is transparent, and works for lenders, end users and the public.

Key Points:

Complex financial products like derivatives are traded in secret instead of in an open market like the stock market, and are not subject to regulation.  Big Wall Street banks gambled in these markets: they made tens of billions when times were good, and then when the gambles went wrong it threatened our whole economy, and we all paid trillions to bail them out.

Bankers treated the whole economy like a casino, and our homes and retirement dollars like their chips. No one has a right to gamble with our retirement plans, college savings, or homes. Under the table trading in derivatives and other complex products was a huge part of this, and we need to put a stop to it.

Wall Street traders and CEOs don’t want any reform of derivatives and other complex financial products because unregulated trade has meant billions in profits and bonuses in their pockets.  They have been playing Russian roulette with our money, and we’re the ones who lose.  We need strong, common sense rules to stop them from gambling with our financial futures and return fairness to the marketplace.

After the Great Depression, for fifty years we had rules that held Wall Street accountable and prevented a financial crisis.  But in the last two decades, Wall Street has taken advantage of loopholes and gotten laws passed preventing us from regulating new products.  Economists say that it was this lack of oversight that was a major cause of the current financial crisis.  We need new rules that require complex financial transactions like derivatives to be traded out in the open under rules that prevent reckless transactions.

Quote from testimony by Rob Johnson, Director of Economic Policy, the Roosevelt Institute, to the House Financial Services Committee:

I believe that the intersection between the OTC derivatives market and the large financial institutions is the financial equivalent of the San Andreas Fault.   Yet there is one difference.  The San Andreas Fault is a natural occurrence that we must all cope with to mitigate the consequences of an earthquake.  It is beyond our power as people to eliminate.    The current state of OTC derivatives regulation and its relation to the guarantees of large financial institutions are a man made fault that is the product past human errors financial legislation and regulation.   It has been revealed by catastrophic events to have devastating consequences. It has produced an unnecessary earthquake.  That earthquake and its consequences need not be repeated.  One can only imagine the consequences for the reputation of those public officials who would choose to act to codify into law this fault line and expose our society to a repetition of the financial crisis that has devastated the world in recent months.

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