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Summer Reading



Today's reading of interest is the Financial Times Summer School article in today's newspaper: "A risky weapon in the corporate armoury." The article is an entry-level primer on the proper use of derivatives and cites as a starting point Warren Buffett's well-known admonition last March that derivatives are "financial weapons of mass destruction."

The writer of the article points out that, taken alone, the characterization of derivatives, in and of themselves, as financial weapons of mass destruction is extreme. But I don't believe that's a fair assessment of the point Mr. Buffett was trying to make in his letter to shareholders. It's a dramatic oversimplification.

I believe the issue is not whether derivatives are risky. Walking across the street is risky. Rather, the issues are whether current regulations of derivatives are enough to protect the market from potential systemic risk issues, and whether we who are further down the food chain from those who comprise the largest component of the gigantic derivatives market are able to adequately assess the risk derivatives pose not just to the companies we invest in, but to the companies for which we work. On the face of it, in my humble opinion, it seems that if we can't really reach an agreement on the overall size of the derivatives market, we're already at the point where we're trying to put the toothpaste back in the tube, rather than trying to prevent the tube from leaking in the first place.

According to the article "more than 200 proposals to prohibit, limit, tax or regulate [derivatives] appeared in the US in the last century." There is no mention of the fact that these proposals have largely failed.

The recent book "Infectious Greed," by Frank Partnoy, argues for increased regulation of derivatives. I bring this book up because I believe the regulatory issue will only become more important going forward. I believe those of us who vote should formulate an educated opinion on the matter, whether it's in favor of increased regulation or completely opposed to it. Partnoy is clearly in favor of increased regulation of derivatives and offers some specific remedies in the last chapter of his book. Again, I do not offer this as a specific endorsement of his views, but as a starting point for understanding what is meant by "regulation" in the first place.

To me, one of the most exciting aspects of Minyanville is that Minyans are opinion makers, not opinion followers. Consequently, the role of opinion maker carries more responsibility than that of opinion follower.

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