NY Times weighs in on financial reform: “loopholes.” Too many derivatives trades are exempted from public disclosure on exchanges. Too many users are subject to relaxed scrutiny. Regulation in hindsight is not adequate to prevent systemic collapse. It is not clear in the reform bills if synthetic CDO’s would be traded on exchanges and subject to business conduct standards and anti-fraud provisions. But most importantly:
What all those proposals don’t address is whether the type of derivative Goldman was selling should even be allowed to exist. The Goldman deal was nothing more than a bet on the mortgage market, in which one side was destined to win and the other to lose, without “investing” anything in the real economy. The C.D.O. did not hold actual mortgage-related bonds, but rather allowed the participants to stake a position on whether bonds owned by others would perform well, or tank. And that helped to further inflate the housing bubble.
That is not investing. It is gambling, and it is abusive. It has no place in banks that can bring down the system if they fail.