How to regulate Derivatives

Warren Buffett famously described Derivatives as Weapons of 'Financial mass destruction' (2002 Letter to Shareholders of Berkshire Hathaway). While we think that this catchy phrase exaggerates the dangers of derivatives it has to be accepted that these contracts are essentially bets similar to futures contracts. As they are highly leveraged - in contrast to futures contracts there often is no margin at all - and no money may change hands when the initial contract is signed they are susceptible to outright fraud or abuse by overambitious traders and financiers. We would like to add to the debate by suggesting that all forms of derivatives are subject to meaningful margin requirements (including capital requirements in balance sheets of banks, insurance companies, corporations and public entities).

Goldman and Greece: Barron's pullls no punches

Barron's Magazine is traditionally a magazine that defends free markets and capitalism. So it comes as a surprise when the Editorial Comment has a go at Goldman Sachs and Wall Street firms in general. When a stalwart of the business community like Barron's and not some leftist publication starts to call them 'Wall Street casino sharks' (sic) is it not time that these firms start to listen and change their business models?

Poor Defense of Speculation

Darrell Duffie tries to revive well-worn arguments (Wall Street Journal, 24 Feb 2010) in defense of unrestrained speculation and does a disservice to free markets by leaving the door open for anti-market regulators. As a Stanford University professor one would expect him to show more awareness that certain speculative activities may well require more regulation in order to allow the rest of the financial markets to function without attracting counterproductive over regulation. Speculation may well serve a useful purpose - some times, maybe most times, but not always. For example, if speculators are allowed to buy insurance on my house (and even hire someone to burn it down in order to cash in on the insurance) then things have gone too far. But that threat exists when there is unrestricted speculation in short selling of shares, CDS contracts and distressed debt.