Little Sense Banning Banks From Derivatives

Derivatives are as ancient as civilization.

When written against real assets -- farmers' crops or homes -- derivatives spread risk, lower capital costs and foster growth. Like any other financial contract, derivatives can be abused and the big bonus culture on Wall Street has given us some high-profile shenanigans. How derivatives are regulated or overregulated is central not just to curbing excess, but to ensuring that farmers can plant, home buyers can borrow, and businesses can invest. Controversy about reform centers around three issues: creating a platform similar to commodities future exchanges to push some 95% of trading from the over-the-counter market into those exchanges; banning banks -- institutions taking government guaranteed deposits -- from running trading desks and holding positions; and limiting synthetic securities. Derivatives often have specialized purposes. For example, chemical manufacturers and life insurers have exposures to energy prices and interest rate movements that vary a lot and these companies need specialized hedges. Pushing virtually all transactions through standardized contracts on public platforms will work poorly, concentrate risks and lower economic growth. Virtually all of the 200 banks that failed over the last two years had no trading desk. Most failed making lousy loans and investing in poor commercial mortgage- backed securities. Now, investment banking activities - yes, trading -- is helping to redeem Citigroup(C). Banning banks from derivatives makes little sense, unless we bring back Glass- Steagall by restricting banks to taking deposits, making loans and holding government debt. Congress has no stomach for that. Banks provide trust services and make markets in municipal and state bonds --both vital services. Banks need to hedge positions, and the recent financial crisis would not have been averted had JPMorgan Chase(JPM), Citigroup and other big banks been banned from derivatives trading. Estimates of the SWAPs market range from $450 to $600 trillion in a global economy less than one-fifth that size. The market is so large because speculators are writing synthetic securities, positions on securities that neither party owns. It's like buying insurance on a North Carolina beach house you don't own.   Loading Comments...   1 2 Last » Next ›

SHARE:

Featured Photo Galleries Go to Slideshow Archive

Connect with TheStreet

Dow Jones S&P 500 NASDAQ 10-Year Note 11096.13 1205.15 2495.65 37.55 Oil * 87.17 DOWN -20.93 DOWN -2.02 DOWN -4.66 DOWN -0.5 10 Yr 3.76% SPDR Gold 112.31 -0.19% -0.17% -0.19% -1.31% Data delayed 20 minutes More From TheStreet Latest Headlines Top Rated Stocks from TheStreet Ratings Cramer's Latest Picks from Mad Money if (Math.floor(Math.random() * 100) < 45) { document.write("NEW: Earnings & Economic Calendar"); } else { document.write("ETF Research Center"); } Find returns with the Dividend Calendar if (Math.floor(Math.random() * 100) < 45) { document.write("Top-rated ETFs from TheStreet Ratings"); } else { document.write("Top-rated Mutual Funds from TheStreet Ratings"); } Twitter Facebook RSS Mobile App adsonar_placementId=1341369;adsonar_pid=879768;adsonar_ps=-1;adsonar_zw=320;adsonar_zh=280;adsonar_jv='ads.adsonar.com'; Brokerage Partners YAHOO.util.Event.on(window,"load",function(){ setTimeout(function(){ TSCM.util.attachScript('scr_intellitxt','http://thestreet.us.intellitxt.com/intellitxt/front.asp?ipid=10685'); },1200); }); Sponsored Links var ads = [ { link:"http://www.entrepreneur.com/business-opportunities/index.html?cam=thestreet&cid=Homepagetextlink1109", text:"Be Your Own Boss and Start your Own Business Today!", trk:null }, { link:"http://ad.doubleclick.net/clk;222499704;4639705;q?http://www.dionmm.com/sl/py/sitets2.py?adsrc=201039", text:"Exclusive Report: How to Best Use TIPS to Protect Your Assets", trk:null }, { link:"http://ad.doubleclick.net/clk;223796514;4639705;q?http://www.niogold.com", text:"NioGold Mining - Own a Share of Canada's Golden Highway.", trk:null }, { link:"http://ad.doubleclick.net/clk;222499786;4639705;a?http://www.dionmm.com/sl/py/sitets2.py?adsrc=201040", text:"Special Report: Will Government Spending Create Huge Inflation?", trk:null }, { link:"http://ad.doubleclick.net/clk;223806605;47528270;g?http://www.optionshouse.com/landing/stocks295/?partner=street&utm_source=street&utm_medium=paid-banner-ads&utm_campaign=textlinks&utm_content=bash-s295-text", text:"$2.95 Flat-Rate Stock Trades @ OptionsHouse.com. Save Now.", trk:'http://ad.doubleclick.net/ad/N6067.272508.7329112262621/B4413938.11;sz=1x1' }, { link:"http://ad.doubleclick.net/clk;223239025;46977159;p", text:"Trade free for 30 days at TD AMERITRADE.", trk:null }, { link:"http://ad.doubleclick.net/clk;223806605;47528270;g?http://www.optionshouse.com/landing/stocks295/?partner=street&utm_source=street&utm_medium=paid-banner-ads&utm_campaign=textlinks&utm_content=bash-s295-text", text:"Why Pay More? $2.95 Flat-Rate Stock Trades @ OptionsHouse.", trk:'http://ad.doubleclick.net/ad/N6067.272508.7329112262621/B4413938.11;sz=1x1' }, { link:"http://ad.doubleclick.net/clk;223830723;47553663;i", text:"Zurich HelpPoint Delivered. Better understand your company's risks.", trk:'http://ad.doubleclick.net/ad/N3867.TheStreet/B4417177.8;sz=1x1' }, { link:"http://ad.doubleclick.net/clk;221025362;4639705;a?http://www.gold101.com/request_information/", text:"Learn How to Buy Gold. Let Us Teach You Today!Superior Gold Group Gold101.com", trk:null }, { link:"http://ad.doubleclick.net/clk;222255324;45405692;b?http://www.realtor.com/?source=a28344", text:"4M listings. Comprehensive & current. Search now on Realtor.com", trk:null }, { link:"http://ad.doubleclick.net/clk;223804138;45405692;f?http://www.wisdomtree.com/bannerads/dxj/dxjlp.html?utm_source=TheStreet&utm_medium=banner&utm_content=dxjtextST&utm_campaign=dxj", text:"DXJ: The 1st Japan equity ETF to hedge yen exposure", trk:null }, { link:"http://ad.doubleclick.net/click;h=v2|3C38|0|0|%2a|r;220770099;0-0;0;44407284;31-1|1;35979936|35997814|1;;%3fhttps://us.etrade.com/e/t/jumppage/viewjumppage?PageName=power_et_for_active_traders_mvt&SC=CS66WEB&ch_id=D&s_id=STRT&c_id=60DAYBT&o_id=60DAY", text:"Trade Free for 60 Days. E*TRADE Securities.", trk:'http://ad.doubleclick.net/imp;v1;f;220770099;0-0;0;44407284;1|1;35979936|35997814|1;;cs=r%3fhttp://ad.doubleclick.net/dot.gif?' }, { link:"http://ad.doubleclick.net/clk;223713956;47431952;m?http://www.optionsxpress.com/promos/virtualtrade.aspx?cmpid=tlSTRcopyA", text:"Practice No Risk Trading at optionsXpress", trk:null }, { link:"http://clk.atdmt.com/BEL/go/206871628/direct/01/", text:"ShareBuilder - Buy stocks for $4 and get a $50 Account Bonus!", trk:'http://view.atdmt.com/BEL/view/206871628/direct/01/' }, { link:"http://ad.doubleclick.net/clk;220815082;44534915;c?http://www.lvcva.com/campaigns?src=4130", text:"Las Vegas is serious about business. VegasMeansBusiness.com.", trk:'http://ad.doubleclick.net/ad/N5664.272508.7284099241621/B4167122.6;sz=1x1' } ]; function __trackingpixel(url){ var ord = Math.floor(Math.random() * 100000000000); if(typeof url != "undefined") { if(url.indexOf('[timestamp]')!= -1) { url = url.replace("[timestamp]", ord); } return ""; } } var counter=-1; var limit = 3; function __write_textlink() { counter++; if(counter >= limit)return; var index = Math.floor(Math.random() * ads.length * 10 % ads.length); var it = ads.splice(index,1); var o = it[0]; document.write(''); document.write( o.text ); document.write( '' ); if(o.trk != null){ document.write(__trackingpixel(o.trk)); } if(ads.length > 0) { __write_textlink(); } else { } }; __write_textlink(); TheStreet Premium Services All Services Action Alerts PLUS Get free access to Cramer's portfolio picks at Action Alerts PLUS - Try it now Free RealMoney Jim Cramer's RealMoney team of 70+ Wall Street pros will give you wealth-building strategies - Get started Free RealMoney Silver Doug Kass + our 5 Premium Services - all in one place - Get a free 14-day trial today Stocks Under $10 David Peltier is ready to help you find affordable Stocks Under $10 which could lead to a big-money payoff - Get access to his portfolio FREE ETF Action Don Dion's brand new service can help investors at all levels build profitable ETF portfolios - Learn more document.write(unescape("%3Cscript src='" + (document.location.protocol == "https:" ? "https://sb" : "http://b") + ".scorecardresearch.com/beacon.js' %3E%3C/script%3E")); var beaconurl=""; if(TSC.util.isDefined(document)){ beaconurl=document.URL; try{ if (top.location != self.location){ beaconurl=document.referrer; } }catch(e){} } COMSCORE.beacon({ c1:2, c2:"6036014", c3:"", c4:beaconurl, c5:"", c6:"", c15:"" }); var pvar = { cid: "us-thestreet", content: "tsc", server: "secure-us" }; var trac = nol_t(pvar); trac.record().post(); View Directory Jim Cramer Doug Kass Market Movers Breakout Stocks Options Alerts Stock Under $10 RealMoney Don Dion's ETF Action Hot Topics: How to Invest in Gold - Fast Money - Motorola Droid - Cramer's Picks - Apple Tablet |    Hot Blogs: Undergraduate Investor - Wall Street Social Resources About Us Advertise Corrections Customer Service Employment Investor Relations Make a Suggestion Privacy Policy Readers' Feedback Sitemap Video Sitemap Subscribe Terms of Use Financial News Archive Topic Archive TheStreet Premium Services Compare All Services Jim Cramer's Action Alerts PLUS: Now any level of investor can trade right alongside a Wall Street pro — and enjoy 24/7 access to his portfolio! Learn More Login NEW! Don Dion's ETF Action: A concise two-step strategy for learning and trading in this increasingly lucrative area of investing. For all levels of investors! Learn More Login RealMoney: Jim Cramer's team of 70+ investment pros offer a daily wealth of fast-breaking market news... analyses... red-hot opportunities...and wealth-building strategies. Learn More Login RealMoney Silver: The genius of Doug Kass + 5 Premium Services = an unrivaled group of expert fundamental analysts, technical analysts, and Wall Street observers. Learn More Login Breakout Stocks: Bryan Ashenberg combines sophisticated screening software with eagle-eye analysis to find small and mid-caps ready to break out! Learn More Login Market Movers Deep in the Money Calls Stocks Under $10 Top Gun Trader TheStreet Ratings Daily Swing Trade Top Stocks ETF Shark Alerts Options Alerts try { function DM_onSegsAvailable(segs, cust_id) { for(var i=0;i Find the Best: Mortgage Rates | CD Rates | Savings Rates | Personal Finance | Retirement | Saving | Budget | Stock Picks document.write('

© 1996-2010 TheStreet.com, Inc. All rights reserved.TheStreet.com's enterprise databases running Oracle are professionally monitored and managed by Pythian Remote DBA.

Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Terms & Conditions. Powered and implemented by Interactive Data Managed Solutions.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

*Oil Data in Market Overview is Brent Crude Pricing

'); TSCM.ads.AdPlacerx.sz = "728x90"; TSCM.ads.AdPlacerx.resetTargets(); TSCM.ads.AdPlacerx.calltype = "adj"; TSCM.ads.AdPlacerx.includeDcopt = true; TSCM.ads.AdPlacerx.additionalTargeting = ";;storytype=opinion;kval=opinion"; TSCM.ads.AdPlacerx.writeTag(); TSCM.ads.AdPlacerx.sz = "336x280,336x850,300x250,468x648"; TSCM.ads.AdPlacerx.resetTargets(); TSCM.ads.AdPlacerx.calltype = "adj"; TSCM.ads.AdPlacerx.additionalTargeting = ";;storytype=opinion;kval=opinion;;storytype=opinion;kval=opinion"; TSCM.ads.AdPlacerx.writeTag(); /** * function wrapper that places all DART ads using TSCM.ads.positionToPlaceholder * if positionToPlaceholder can't find the elements specified, it just returns and is ready for the next call */ TSCM.ads.placeLazyLoadingAds = function() { // DART 1 (banner) TSCM.ads.positionToPlaceholder({ ad: 'ad728x90', placeholder: 'bannerContainer', flexibleHeight: false }); //DART 2 TSCM.ads.positionToPlaceholder({ ad: 'customUnit', placeholder: 'cauContainer', flexibleHeight: true }); //DART 3 TSCM.ads.positionToPlaceholder({ ad: 'boxAd', placeholder: 'boxAdContainer', flexibleHeight: true }); //DART 4 TSCM.ads.positionToPlaceholder({ ad: 'secondBoxAd', placeholder: 'secondBoxAdContainer', flexibleHeight: false }); }; TSCM.ads.placeLazyLoadingAds() window.setTimeout(function() { TSCM.ads.placeLazyLoadingAds() }, 2000); window.onresize = function() { setTimeout(function() { TSCM.ads.placeLazyLoadingAds(); }, 1000); }; BF_BB_DATA = null; (function( ){ document.write(''); var sid="76IOF7"; var c=""; var b=""; BF_BB_SCRIPT=document.createElement('script'); BF_BB_SCRIPT.type="text/javascript"; BF_BB_SRC="http://buzzbox.buzzfeed.com/wd/BuzzBox?sid=" + sid + c + b + '&it=1&cb=' + (new Date()).getTime(); setTimeout(function() { document.getElementById('BF_BUZZBOX').appendChild(BF_BB_SCRIPT); BF_BB_SCRIPT.src=BF_BB_SRC; },1); })();

After the Bell

Before the Bell

Booyah! Newsletter

ETF Daily

Midday Bell

TSC Top Ten Stories Newsletter

Winners & Losers

TheStreet Mobile Edition

Take Our Tour

Connect with TheStreet

Read Full Article »