There seems little doubt tighter regulation of esoteric financial derivatives that have played a major role in the financial crisis is on the way, but one influential lawmaker is weighing a more drastic measure: banning them outright.
Sen. Tom Harkin (D., Iowa), chairman of the Senate Agriculture Committee, which regulates derivatives and so has a claim to authority over credit default swaps, has repeatedly questioned whether the $60 trillion industry should be outlawed. The unregulated derivatives, which insure lenders against borrowers' default on debt, have been blamed for the financial meltdown of companies like American International Group (AIG), which required a multi-billion government bailout last month.
"They've been touted as reducing risk, but as we have seen, it has actually increased the risk, the systemic risk, of the whole society," Harkin said during an Oct. 14 hearing exploring the need for greater regulation of the derivatives.
It is unclear how much support an outright ban of CDS would have in Congress and Harkin has not yet introduced legislation on the subject. Still, the debate has exposed the enormity of the gulf between a Democratic party that looks to have a significant mandate to regulate business for the first time in decades and a Wall Street community that is used to being left alone by Washington."People on trading desks don't really typically know how to interact with people who are making laws, because most of the stuff we do is unregulated," says a senior trader at a large bank, who declined to be identified.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass + 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV