600 trillion reasons why we need more regulation of the financial markets

A year ago, we were all waiting for the other shoe to drop. The financial giant Bear Stearns had tanked. The stock market was jumping up and down like a Mexican jumping bean. The talking heads on the financial channels had no good news. They also had no good answers. It seemed clear that the one thing that was going to occur was the regulation of the financial markets. We were gonna do something about these cowboys who were taking enormous risks with our money.

I would like to think that I’m somewhat of a smart guy but I don’t get derivatives. Whether it is mortgage-backed derivatives or whatever, I’m not sure why it is legal to slice up debt and wrap it in other securities and call that a AAA bond rating. To me it is the reverse Osmond theory: one bad apple, if it’s big and stinky enough, does spoil the whole bunch. Derivatives, through some magical mechanism, help business manage risk. It seems to me that businesses were managing risk before derivatives were invented and seemed to do quite well at it.

I foolishly thought that there was very little warning when the financial meltdown hit. It was like a fast approaching meteor from out of the sky, I thought, but I was wrong. Years ago, in medicine, when gastrointestinal bleeding from the stomach was very common, physicians talked about a sentinel bleed, a small bleed before the patient really started bleeding. In the financial district, we had Long-Term Capital Management. This was our sentinel event. Back in the summer of 1998, Long-Term Capital Management was ground zero. The story is now very familiar. The executives who ran this hedge fund were thought of as the smartest people in the room. They were heavily invested in derivatives and in overseas markets. This was the go-go ’90s, so returns of 30 and 35% were not cause for alarm but cause for celebration. Everybody wanted to get in until the Russian market began to collapse. The credit markets froze up. Long-term Capital Management did not have enough assets to cover their debt. Because they were a hedge fund, they were basically unregulated. Because they dealt in derivatives, they were almost completely unregulated. Because of their ties to other financial institutions, it seemed that this relatively small company was going to bring down a financial sector. The company was hemorrhaging $500 million a day.

The Secretary of the Treasury, Robert Rubin, called in 14 banks. They were supposed to shore up this dying hedge fund. Larry Summers, he was there. Alan Greenspan was there. Timothy Geithner was there. We’ve seen all these players before. Robert Rubin convinced 13 of the 14 banks to put up $3.65 billion. (This is almost exactly what Secretary Paulson did when Merrill Lynch was drowning in debt. He asked (told) Bank of America to bail out Merrill Lynch. I still want to know why Bear Sterns and Lehman were allowed to go belly up and Merrill wasn’t.)

So, here’s my question. After the meltdown in the summer of 1998, why didn’t Congress begin to regulate hedge funds and derivatives trading? I guess we can forgive Congress for their lack of foresight and vision (even though that’s what we pay them for). We had the financial geniuses that were telling members of Congress that the financial sector didn’t need any regulation. We had lobbyists, tons of them, telling Congressmen that regulation simply wasn’t needed. “The market would regulate itself.” Remember that? This must of been some version of the Jedi mind trick. Well, it is a decade later and it turns out that the market cannot regulate itself. We learned this lesson back in 1929 and we learned it again in 2008. Can Congress gather their strength and willpower to enact thoughtful regulation? Will Congress be steamrolled by financial gurus who really don’t know squat? To be honest, I don’t mind if a bunch of Wall Street executives go belly up every 10 years or so. I do mind if hard working Americans see their pensions go up in flames because of the shenanigans of these knuckleheads. These guys have created a $600 trillion unregulated market. Al Capone couldn’t have done any better.

Frontline has a GREAT documentary on this subject. Brooksley Born was a heroine. She tried to warn us.

0 Responses

  1. hey, does the person who wrote this article know that the us gdp is approx 15 trillion? when i went to school, 1 plus 1 equaled 2. they say this is a new era. am i to assume that 1 plus 1 equals something else now? if not, then this idiot has some numbers to crunch. do the math before you try to sound like you know what youre talkin about, please. some of us out here who read, actually DO know whats going on. maybe youd like to join us?

  2. Hey, dick cheese. I try not to be rude to my commenters but your a moron and a sarcastic moron to boot. I didn’t just pull that number out of my butt. If you would click in the link provided you would see that Mark Bricknell, Chair of the International Swaps and Derivative Association said that the derivatives market is $600 trillion. Then there’s an article in Slate Magazine that explains what you clearly don’t understand. 

    You know that it is okay to be uninformed. If you would have asked a question, I would have provided the answer. But when brainless dorks like you try to sarcasm to mask your stupidity, I have to roll up my sleeves and let you know what’s what.

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ABOUT AUTHOR
Errington C. Thompson, MD

Dr. Thompson is a surgeon, scholar, full-time sports fan and part-time political activist. He is active in a number of community projects and initiatives. Through medicine, he strives to improve the physical health of all he treats.

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The Thirteeneth Juror

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