Derivatives

Did Lehman Brothers die in vain?

Having once worked for Lehman Brothers and having championed financial reform long before it became fashionable subject, I have strong opinions on the issue. Just as I was about to write something for the 5th anniversay of Lehman's collapse, a Good Samaritan sent me this transcribed text of a keynote speech I had made at the 2nd anniversary of the collapse. After browsing through it, I decided it did not need any editing -  so here goes… It is also a good précis of my book that you can download here. You might also want to read my recent FT op-ed on how financial reform is lagging behind and a piece I wrote on what a good banking system ought to look like. Enjoy!

The world has been rocked by the most major financial and economic crisis in recent history. This exposed several aspects of financial system dysfunction. These not only increased the instability of the financial markets, but also impeded their normal functioning as tools to allocate economic resources efficiently throughout the real economy.

The collapse of Lehman Brothers two years ago was at the heart of this crisis. This is not a Eulogy to Lehman Brothers. That having been said, Lehman in death managed what it could not do while alive – be more famous than its peers Goldman Sachs and Morgan Stanley. In death, Lehman may have performed a greater service for society than it did perhaps in the many decades of its existence – provided of course that we have learnt the right lessons from its failure and acted on them. Did Lehman die in vain? 

Lehman Brothers is Dead - Long Live Lehman Brothers

Transcript of a Keynote Speech I delivered In Berlin on the 15th Sept 2010

The world has been rocked by the most major financial and economic crisis in recent history. This exposed several aspects of financial system dysfunction. These not only increased the instability of the financial markets but also impeded their normal functioning as tools to allocate economic resources efficiently throughout the real economy.

What's all this Financial Transaction Tax fuss about?

EU leaders are at it once again; putting Financial Transaction Taxes (FTTs or Tobin Taxes as they are also called) back on the agenda while they are forced on the back foot by the unresolved Euro crisis. At a time when citizens are losing faith in the ability of our leaders to solve the crisis, talking about FTTs, which remain heavily popular with the public, almost always earns political brownie points.

But what can FTTs really achieve? And is the current approach, presented by the European Commission, designed to succeed? If not, should be abandon the idea altogether or is there another tax design that will work better?

One thing is for sure FTTs will not change the world, nor democratize global finance. Nor will they raise the hundreds of billions of Euros of revenue that is sometimes attributed to them. But, approached sensibly, a well-designed and flexible regime for financial transaction taxes can deliver a lot of benefits.

Interveiw with Rob Johnson and Sony Kapoor on 'Too Complex to Fail'

Too complex to regulate? by Andrea Orr, Economic Policy Institute
 

http://www.epi.org/analysis_and_opinion/entry/too_complex_to_regulate/

Lawmakers seeking to prevent a repeat of the greatest financial meltdown since the Great Depression are considering ways to impose tighter regulations on big investment banks, where trading of credit default swaps and other derivatives reached unsustainable levels, helping bring the economy to the brink of disaster in 2008. Although they are commonly described as a form of insurance against defaults on home mortgages, the credit default swaps sold by A.I.G. and other firms became so widespread and complex over the past decade that it became almost impossible for the banks themselves, let alone outside regulators, to sort out the real value of these popular investments or assess the risk.

The rise in trading of derivatives — sophisticated financial instruments whose value is derived from something else such as home mortgages — also underscores how far so many banks have strayed from what should be their main mission of providing lending to individuals and small businesses to help support growth in the general economy. Critics note that derivatives trading escalated to a rapid back-and-forth exchange of paper certificates where the value often had little connection to real economic activity.

If “Too Big to Fail” and “Too Connected to Fail” have become the slogans justifying the repeated government bailouts of some major banks and insurers such as A.I.G., these firms’ continued resistance to tighter government restrictions might be summed up as “Too Complex to Regulate.”

That complexity is neither necessary nor useful, argue Robert Johnson, an EPI board member who previously served as managing director of Soros Fund Management as well as chief economist for the Senate Banking and Budget Committees; and Sony Kapoor, a former investment banker who now heads the international think tank Re-Define (Rethinking Development, Finance, and Environment). In recent interviews, Johnson and Kapoor discuss how Wall Street uses extreme complexity as a shield to pad its profits and keep regulators guessing, and why banks need to return to the sort of activities that serve people on Main Street.