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Geithner: Derivatives market needs transparency

Regulation of the derivatives market needs substantial overhaul, including more transparancy, Treasury Secretary Tim Geithner is testifying at this moment in the Senate.

Derivatives are basically securities whose value is based on an underlying asset.

One type of derivative is something you've heard a lot about over the past year -- credit default swaps. A credit defaut swap is an insurance policy against default on a debt.

Although derivatives are a crucial part of the market-based economy, because they enable companies to manage risks, they can be massively abused, as we saw last year. As Geithner says in his testimony:

"Under our existing regulatory system, some financial firms were allowed to sell large amounts of protection against certain risks without adequate capital to back up those commitments. The most conspicuous and most damaging examples of this phenomenon were the monoline insurance companies and AIG. These firms sold massive amounts of credit protection, including on mortgage-backed securities and other more complex real-estate related securities, without the capacity to meet their obligations in an economic downturn."

Geithner is testifying before the Senate committee on agriculture, nutrition and forestry, which, for some reason, has authority on regulating over-the-counter derivatives. Which I guess tells you all you need to know about the state of regulation for OTC derivatives. (Okay, it's because derivatives are used in the agricultural commodity market, which trades a lot of futures, which are are one type of deriviate. But still. Right?)

Here are the administration's four points for derivatives regulation reform:

-- Preventing activities in the OTC derivative markets from posing risk to the stability of the financial system.

-- Promoting efficiency and transparency of the OTC derivative markets.

-- Preventing market manipulation, fraud and other abuses.

-- Protecting consumers and investors by ensuring that OTC derivatives are not marketed inappropriately to unsophisticated parties.

You can read Geithner's testimony by clicking here.

This is all part of the White House's sweeping attempts to reform the financial industry.

Today, Rep. Barney Frank's (D-Mass.) Financial Services Committee is expected to pass, along party lines, its "too big to fail" bill, which imposes new rules on banks, attempting to prevent them from growing too big to be allowed to fail, thus requiring taxpayer bailouts.

-- Frank Ahrens
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By Frank Ahrens  |  December 2, 2009; 10:17 AM ET
Categories:  The Ticker  | Tags: Barney Frank, Tim Geithner, derivatives  
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Comments

This was patently obvious a year (and 360 Billion dollars) ago to anyone not connected to Wall Street. So now we're finger-pointing and name calling, are we?

It's about time there was some action. I can only assume it was delayed because it directly endangers the multi-billion dollar bonuses "earned" by those touting "creative financial instruments". The American taxpayer, and the global economy need protection from the unfettered greed of these parasites.

Those who think I'm a bit harsh should take a vacation in Iceland and tell the locals it's because of their bonus from selling derivitives. Then the fun begins!

Posted by: shadowmagician | December 2, 2009 11:52 AM | Report abuse

Transparency.

That's the reflexive wail of the uber-right-wing at any suggestion that things actually be REGULATED so as not to do harm.

Bribes in the form of campaign contributions? Well, let's have transparency! That'll fix everything!

Being ripped off by Wall Street who robs your very pockets directly with taxpayer bailouts stewarded bu this freak? Oh, Lordy, Lordy, let's have more transparency! After all, you testified as the sitting head of the NY Fed that you were not, and never have been, a regulator -- your words, Tiny Tim, not mine.

Geithner has GOT TO GO. Send HIM to Afghanistan.

Posted by: trippin | December 2, 2009 12:46 PM | Report abuse

Frank Ahrens writes: "Derivatives are basically insurance against default on a debt."

This is so simplistic as to be misleading. Derivatives are securities that derive their value from changes in the value of an underlying asset. Credit-default swaps are just one form of a derivative.

Another example of a derivative is signing an agreement to purchase an ounce of gold in six months at today's market price. As the price of gold changes, your profit or loss goes up and down as well.

Let's be clear that reforming the derivatives markets will affect more than credit default swaps.

Posted by: Jacknut | December 2, 2009 1:52 PM | Report abuse

We are being asked to cover the bets as we did in the recent bailout. It is a lot like standing at the door of a Las Vegas casino and asking gamblers if we can cover their debt. Anybody that covers a gamblers debt should be entitled to some of the reward. Along this line I would like to see derivatives taxed at every transaction point. This would make the market transparent while covering some of the losses for the inintended investors, the public.

Posted by: stanbarkley | December 2, 2009 2:49 PM | Report abuse

Thank goodness we have Democrats like tax cheat Timmaaaay, brothel owner Bawney Fwank, and Chris Dodd with his sweetheart mortgage from Countrywide handling financial reform. Much better than those crooked fat cat Republicans.

And we should put a fine upstanding Democrat like Charlie Rangel in charge of Ways and Means. What, he already is? Well I'll sleep like a baby tonight.

Posted by: Jeff08 | December 2, 2009 3:50 PM | Report abuse

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