Securitization Redux and an attack on listed derivatives?

The listed derivatives industry market structure, regulated but still efficient and effective, survived the global financial crisis relatively intact. The overall banking industry did not fair as well. Yet, we are seeing moves afoot in the US to change the regulatory regime for listed derivatives.

At the same time, according to a Dow Jones eFinancialNews announcement, Goldman Sachs and Barclays are working on new securitisation schemes to circumvent capital requirements. I thought this was in large part how we got into this mess, an over-reliance on credit risk transfer that was proven to be very flawed. In Gillian Tett's book "Fool's Gold" she states the primary motivation was to be able to transfer credit risk from JP Morgan's books so that they could reduce capital requirements; otherwise the overall returns would be miniscule. It is no surprise then that banks are once again looking on how they can circumvent the Basel accord capital requirements. In these times of low interest rates, without credit derivatives banks cannot provide an acceptable return.

Don't get me wrong - I am in the camp that says it is not credit derivatives that kill banks, it is the people that use credit derivatives that kill banks. Credit derivatives are an important innovation. I can't help but speculate if we had a global issuer and guarantor or a system of interconnected issuers and guarantors if we would be in this same position. Could the meltdown have been avoided?

Which brings us to the point of this article. We hear rumblings that the US government is going to remove tax incentives for listed derivatives market makers and the CFTC is looking to increase capital requirements for brokers. One has to wonder what is the motivation to modify regulations in areas of the financial markets that performed well during this once a century financial meltdown. One reason not to be overlooked is that elected officials and regulators have to do something to respond to the current financial crisis and they can make changes in the already well regulated sector they understand and that is under their control. This is a much easier approach for some quick fixes than pursuing the complicated and unregulated world of OTC derivatives and its successful lobbying infrastructure, which will take much more time.