It seems that a name change is preparing to come down the pipe with regards to the highest regulatory position in the sticky world of financial derivatives. The Commodities Futures Trading Commission (CFTC) is tasked with the job of regulating a market in which even the smartest player have only the slightest idea of how to navigate. Navigating the derivatives market is akin to sailing through the Bermuda triangle. It is a vast landscape littered with camouflaged land mines and surface laying gold mines. The often times purely perceptual profits being generated are too tempting for many of the large player in the derivatives market to keep their positions within a manageable range. This temptation can be assumed to be greatly intensified with the recent precedent having been set that large banks are considered “too big to fail.”
Warren Buffet, often erroneously touted as one of the world richest men, happens to be one of the most successful individuals in the investment world today. When a player of his status harshly criticizes derivatives, calling them “financial weapons of mass destruction,” one should at a minimum take notice. In a private interview with the Financial Crisis Inquiry Commission a little more than 2 years ago, Buffet went on to elaborate on his position regarding the use of derivatives and the potential threat they may pose.
Buffet spoke of the size of the derivatives market, and how unpredictable the whole thing is. He was criticized sharply at one point for his use of derivatives himself, but if looked into, his use of derivatives is significantly less than any of the major banking institutions that make heavy use of the risky contracts. He also opened up quite candidly about what he believed the reasons were why some companies decide to dabble in derivatives, explaining that some companies use the contracts to attempt to smooth out earning and appear to be less volatile than they are in reality. Perhaps one of the more interesting statements Buffet made was when he chatted about the trillions upon trillions of dollars in derivatives contracts that JPMorgan has on its books. His major worry was not just that they were on the book, but what exactly what the “discontinuities are going to do to those numbers [the contracts on JPMorgan’s books] overnight if there’s a major nuclear, chemical or biological terrorist action that really is disruptive to the whole financial system.”
When you take statements like these into account, it becomes more apparent that sailing and investment bank through the derivatives market with huge position is like sailing a merchant vessel through the bermuda triangle searching for floating treasure. The only thing masking the deadliness of the proposition would seem to be past bailouts and the precedent now that certain institutions are “too big to fail.”
Keeping this information in mind, the recent news of a coming change in the leadership of the CFTC chairmanship should not really make anyone’s hope rise too high. Timothy G. Massad is set to replace Gary Gensler as the head of the CFTC, assuming that Senate finds enough cooperation floating around on the hill. Massad, is coming off a post as a Senior Treasury Department official, a position which would seem not to threaten much change in the system considering that they treasury department has been satisfied for nearly a century now to take its orders from the Federal Reserve. If Senate does happen to allow this through, I’m predicting it’ll be a case of the same game with a different name going on in the offices of high finance and high finance “regulators.’
By Daniel Worku