Chapter 4: Derivatives and Securities: The Finance Industry
INTRODUCTION: DERIVATIVES AS CONTESTABLE TERRAIN The political polarization generated in the analysis of the derivatives markets was confirmed in the most recent FCIC Report (FCIC 2011) where in the final report there was a division between Democrat commissioners signing the majority report and Republican commissioners submitting two dissenting statements. The majority commissioners report made the case that unregulated markets in over-the-counter derivatives were one of the major causes of the financial crisis. The majority FCIC report stated: without any oversight, OTC derivatives rapidly spiraled out of control and out of sight, growing to $673 trillion in notional amount. This report explains the uncontrolled leverage; lack of transparency, capital, and collateral requirements; speculation; interconnections among firms; and concentrations of risk in this market . . . Companies sold protection – to the tune of $79 billion, in AIG’s case – to investors in these newfangled mortgage securities, helping to launch and expand the market and, in turn, to further fuel the housing bubble . . . Goldman Sachs alone packaged and sold $73 billion in synthetic CDOs from July 1, 2004, to May 31, 2007. Synthetic CDOs created by Goldman referenced more than 3,400 mortgage securities, and 610 of them were referenced at least twice. This is apart from how many times these securities may have been referenced in synthetic CDOs created by other firms. (FCIC 2011, p. 27) Commissioner Wallison (2011) in his statement of dissent made the case that it was the government housing policy of extending home ownership and using the Community Reinvestment Act (CRA)...
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