Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Summer Reading

By

PrintPRINT

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.

< Previous
  • 1
Next >
No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

PrintPRINT
 
Featured Videos

WHAT'S POPULAR IN THE VILLE