We do love a good battle of the intellects here on FT Alphaville, so it was impossible to pass up this opportunity.
On Thursday, the FT featured an op-ed by CFTC chairman Gary Gensler on the topic of derivatives.
As Gensler argued in his incendiary piece, titled ‘How to stop another derivatives inferno‘:
In the autumn of 2008, certain financial institutions kicked over the lantern that set off the financial crisis – a fire that nearly burned down the global economy. In America, more than a year later, unemployment is at nearly 10 per cent. Most of those who have lost their jobs never used the flammable financial contracts that helped create the crisis. As regulators, we have a responsibility to establish codes that will ensure the concentrated, opaque derivatives market never again brings the financial system to the brink of collapse.
According to Gensler, for this to be achieved, the following must be implemented:
First, we must explicitly regulate the financial groups that deal in derivatives.
Second, to bring transparency to market participants and the public, standard OTC derivatives should be required to be traded on exchanges or other trading platforms.
Third, to lower risk further, standard OTC derivatives should be brought to clearing houses.
To which Craig Pirrong, a Professor of Finance at the University of Houston who blogs at the Streetwise Professor, replied (in equally inflammatory fashion):
Gensler also asserts that OTC derivatives were the underlying cause of the financial crisis. He provides no evidence whatsoever–other than the tired AIG trope. This is a complete misreading of the history of the crisis…
Gensler also makes some assertions that are categorically incorrect…
More generally, on the transparency and exchange trading arguments, Gensler implies that market participants that willingly choose to trade on OTC markets instead of readily-available exchange alternatives don’t know their business.
I could go on and on, but I’ll let it rest here for now.
(He didn’t.)
Both of these gentlemen are in highly visible roles – and the debate over how to mitigate the risks associated with derivatives is an important one.
So as much as we enjoy a duel, FT Alphaville would like to encourage all involved to put the gloves back on.
Related links:
Guest post: Roger Ehrenberg asks, ‘are derivatives the real problem?’ – FT Alphaville
Barney Frank, pragmatic derivatives defender – FT Alphaville
Prof Craig Pirrong on the pricing-clearing link in the derivatives market – FT Alphaville
Dear derivatives traders: the SEC is watching you – FT Alphaville