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The Obama administration's proposal for regulating derivatives is a good step, but "reopens a dangerous loophole," says Frank Partnoy, University of San Diego law professor, in an op-ed in this morning's (May 15) New York Times. Partnoy was the first to expose the derivatives fraud in his 1997 book, "F.I.A.S.C.O." He arrived in San Diego just as the book was gathering steam. "For nearly two decades, derivatives have been at the center of every major financial calamity," writes Partnoy, but they have become subject to "progressively less regulation," thanks to people like Alan Greenspan, Arthur Levitt, Robert Rubin, and Larry Summers. Financial institutions use derivatives to skirt investment restrictions and avoid disclosure rules, notes Partnoy. Unfortuntely, the administration's regulation proposal splits derivatives into two categories: those traded on regulated exchanges, and privately negotiated contracts between two financial organizations, sometimes called "swaps." These private transactions "would be reported privately to a 'trade repository,' which apparently would make only limited aggregate data available to the public," writes Partnoy. This division goes back to 1989, and has proved disastrous. Says Partnoy, "Most people do not trade derivatives, [but] everyone is subject to their risks. All derivatives, exchange-traded or private, must be in the sunlight."
The Obama administration's proposal for regulating derivatives is a good step, but "reopens a dangerous loophole," says Frank Partnoy, University of San Diego law professor, in an op-ed in this morning's (May 15) New York Times. Partnoy was the first to expose the derivatives fraud in his 1997 book, "F.I.A.S.C.O." He arrived in San Diego just as the book was gathering steam. "For nearly two decades, derivatives have been at the center of every major financial calamity," writes Partnoy, but they have become subject to "progressively less regulation," thanks to people like Alan Greenspan, Arthur Levitt, Robert Rubin, and Larry Summers. Financial institutions use derivatives to skirt investment restrictions and avoid disclosure rules, notes Partnoy. Unfortuntely, the administration's regulation proposal splits derivatives into two categories: those traded on regulated exchanges, and privately negotiated contracts between two financial organizations, sometimes called "swaps." These private transactions "would be reported privately to a 'trade repository,' which apparently would make only limited aggregate data available to the public," writes Partnoy. This division goes back to 1989, and has proved disastrous. Says Partnoy, "Most people do not trade derivatives, [but] everyone is subject to their risks. All derivatives, exchange-traded or private, must be in the sunlight."