Comment Harvard Law Forum: Derivatives: Clearinghouse Over Confidence
http://blogs.law.harvard.edu/corpgov/2011/10/31/clearinghouse-over-confidence/
http://beta.project-syndicate.org/commentary/clearinghouse-over-confidence
Professor Roe,
A couple of anecdotes on opacity:
1. In late 2008, Congressman Peterson of MN was Chairman of the Agriculture Committee in the House and introduced legislation to put an end to the majority of “naked swaps”—this brought an onslaught of criticism by the banking and insurance lobbies;
2. In 2009, I was hosting a panel for the Research and Statistics Division at the Board of Governors of the Federal Reserve regarding commercial real estate and capital markets and wanted to find out what amounts were referenced and appended to commercial real estate and CMBS financing. I contacted ISDA and the Pension Real Estate Association research departments —they no data;
3. I had lunch with officials from OCC and inquired if I could see the back-up data to their call reports delineating a breakdown of OTC derivatives by type of securitized products or asset classes, i.e. how they broke out by the various groups (residential loans, commercial loans, credit card debt, student loans, etc.). The reply was that their data was “not that granular”.
4. I won’t mention here the “steam rolling” of Brooksly Born by Larry Summers, Phil Graham and Alan Greenspan—but it was pivotal in setting up the debt crisis.
From a paper of mine Speculative Economics which enumerates factors to review:
“A review of derivatives, especially the unregulated swaps or OTC markets, and how their existence and use has acted to magnify the bursting of an otherwise severe but manageable series of “asset bubbles” into a complexity at a higher “order of magnitude” than has been contemplated in modern times—which has virtually frozen the capital markets. As a note, these instruments are termed by some as “welfare enhancing” credit risk transfer instruments — which create diversification and liquidity. However, the speculative nature and volume of these unregulated instruments have been daunting to the international financial system and hard on real economies.”
The opacity of these markets is the primary driver in holding the U.S. and global economies in suspended animation—markets can’t clear—simply because derivatives still remain uncontrolled and unaccounted. At least a clearing house would be start.
