After about a year of wrangling, we’re now into the final stretch of financial regulatory reform! Sen. Dodd of the Finance Committee, Rep. Frank of the Financial Services Committee, and the White House have all said that a financial reform bill will likely be on the President’s desk by Memorial day.
As Global Trade Watch has extensively documented, the
Members of Congress must push back hard against those who are trying to remove the teeth from the reform proposals. Wishful thinking about the capacity of financial services corporations to properly mange huge risks does not negate the fact that a tough regulatory framework is necessary. This fact is illustrated quite clearly in the results of a 2004 survey of 84 finance professors conducted by the International Swaps and Derivatives Association. This survey would be a barrel of laughs if the consequences of these attitudes weren’t so disastrous.
Some of the highlights:
- 100 percent of respondents agreed with the statement that “Derivatives help companies manage financial risk more effectively.”
- 99 percent of respondents agreed that “The impact of derivatives on the global financial system is beneficial.”
- 81 percent of respondents agreed that “The risks of using derivatives have been overstated.”
It’s disheartening that these “experts” could not fathom the role that derivatives would play in the 2008 financial meltdown. In their extended comments, many of them claimed that derivatives helped promote financial stability:
“[Derivatives] allow the transfer of risk from parties that don't want to bear risk to parties that can. For example, credit derivatives make the banking system safer.”
- James Angel, Associate Professor of Finance,
: McDonough Georgetown University
“Derivatives with high counterparty credits allow intermediaries and dealers to hedge their positions much more effectively, at a much lower cost and in a speedier fashion. This greatly reduces the insolvency/liquidity risk of intermediaries and dealers thereby adding stability to the global financial system.”
- Mo Chaudhury, Faculty Lecturer in Finance,
“By allowing for a more efficient management of risk derivatives have resulted in a more efficient allocation of capital. An efficient allocation of our resources, including capital, allows for more rapid global economic growth. It is through economic growth that each generation has the ability to live better than past generations. Thus, an expanded efficient use of derivatives is an important component for future economic growth.”
- Michael Brandl, Lecturer,
Universityof Texasat : McCombs Austin