Satyajit Das, author of “Traders, Guns & Money, in a long-but-worth-your-time guest post at naked capitalism, lays out the depressing, albeit likely, route that derivatives regulation is likely to take (which at one point I recall was estimated to be a $62 trillion market. Not sure where it is now, or, given Das’ post, how anybody could even know.) He explains in detail the extreme granular complexity of the market, which itself is a formidable obstacle to regulation.
Keep in mind here, the banking lobby is a very well-oiled machine, and will throw whatever needs to be thrown in the path of any new rules that might crimp profits. Given everything that has happened, it’s beyond me that strong regulation of the derivatives market would not be a cornerstone of any reform plan that comes out of Congress, but this isn’t the sharpest Congress we’ve ever had.
Debate over regulation of financial services has taken on a frenzied tone. Regulators and think tanks are producing voluminous, overlapping and (sometimes) contradictory proposals. Regulatory agencies are jockeying for position, sometimes forming unlikely coalitions to preserve or expand territory. In the U.S. Congress, multiple bills and several committees are jostling to make sense and harmonise complex and irreconcilable draft legislation. Activity and achievement are confused.
Banks and their lobbyists do not believe that there is a case for regulation. In William Davenant’s words: “Had laws not been, we never had been blam’d; For not to know we sinn’d is innocence.”Banks argue that the complex nature of derivative trading dictates that self-regulation is the only feasible approach. If that fails, then banks seek to minimise scrutiny of major issues, such as the size of the market, speculative activity, pricing issues, complexity and mis-selling of derivatives to unsuitable clients. They argue that existing regulations already adequately cover some issues. Proposed regulations will be masterfully narrowed to minimise impediments to profitable activities.
There will be a familiar threat. Lack of international agreement and regulatory uniformity makes compliance impractical. Banks and derivative activity will relocate with losses of jobs and taxes to the host country. Familiar arguments will be heard regarding the loss of competitive advantage, diminished financial innovation, slower capital formation and higher cost of capital. Each is a well-known step in the familiar “regulatory tango”.The complexity of the issues means that ultimately no laws may be truly effective. As one famous law maker, Adlai Stevenson, observed “Laws are never as effective as habits.”Groucho Marx observed that “[government] is the art of looking for trouble, finding it, misdiagnosing it and then misapplying the wrong remedies.” Legislators and regulators are likely to discover the truth of that proposition in their attempts to regulate the derivative market.