Skip to comments.How to save Wall Street
Posted on 04/29/2010 3:42:10 AM PDT by Scanian
As the Senate moves forward with debate over financial reforms this week, New Yorkers should remember one thing: Weak rules may let Wall Street rake in big profits in the short term, but they will erode confidence in US markets, hurting the financial institutions -- and the city -- in the long run. What's vital is to preserve the global perception that American markets treat everyone fairly.
At issue are unrestrained derivatives. These are financial instruments whose value goes up and down if the value of something else goes up or down -- so if you think pork-belly prices are going up, you don't have to buy a pig.
Derivatives have gotten a bad name recently, but the world needs them -- even those that seem hurtful. Goldman and its clients have come under fire for using derivatives to "short" the housing market. But how else would a then-minority of investors have convinced the world that the housing bubble had to pop?
If you think California is borrowing more than it can afford, you can't do much -- except buy a derivative whose value rises with the probability of default. The messages that investors send through these instruments are important.
Problem is, derivatives need rules that make them into "markets."
(Excerpt) Read more at nypost.com ...