http://www.ft.com/cms/s/0/3b52b642-217c-11df-830e-00144feab49a.html On October 8 1871, what started as a small fire swept across Chicago to destroy much of the city. The story goes that it was ignited when Mrs O%u2019Leary%u2019s cow kicked over a lantern in her barn. Many buildings were made of wood, so the fire spread quickly. In the years after the fire, Chicago implemented new building and... [more]
http://www.ft.com/cms/s/0/3b52b642-217c-11df-830e-00144feab49a.html
On October 8 1871, what started as a small fire swept across Chicago to destroy much of the city. The story goes that it was ignited when Mrs O%u2019Leary%u2019s cow kicked over a lantern in her barn. Many buildings were made of wood, so the fire spread quickly. In the years after the fire, Chicago implemented new building and fire codes. Those rules now protect the residents of Chicago from the spread of future fires.
In the autumn of 2008, certain financial institutions kicked over the lantern that set off the financial crisis %u2013 a fire that nearly burned down the global economy. In America, more than a year later, unemployment is at nearly 10 per cent. Most of those who have lost their jobs never used the flammable financial contracts that helped create the crisis. As regulators, we have a responsibility to establish codes that will ensure the concentrated, opaque derivatives market never again brings the financial system to the brink of collapse.
Derivatives are meant to help lower risk and make it easier to discover the price of risks and assets. But unregulated derivatives heightened and concentrated risk and lessened transparency, making it harder to price risks and assets. US taxpayers bailed out AIG with $180bn when that company%u2019s ineffectively regulated $2,000bn derivatives portfolio, managed from London and cancerously interconnected to other financial institutions, nearly brought down the financial system. As we later learnt, much of the bail-out money flowed through AIG to US and European banks. The recent chill winds affecting the euro have further revealed how derivatives can be used by a sovereign country, such as Greece, to borrow from a financial institution, while obscuring the embedded loan.
[less]
