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