DERIVATIVES INDUSTRY LEAVING SOUR TASTE IN BUYERS' MOUTHS
August 26, 2007 -- IT'S an export once loved round the globe - coveted for its efficient pricing, good value and perceived quality. But of late. buyers worldwide who have been freaked out about safety concerns have increasingly shunned these products.
Chinese toys? Tainted toothpaste? Poison pajamas?
No, the export in question is manufactured right here in Manhattan, no lead paint involved. Still, the backlash against Wall Street's cash cow export - the multitrillion-dollar, multi-fangled derivatives industry is mounting around the globe. And the outrage is not much different than that of a parent with a toxic Elmo doll.
With Congress on vacation, U.S. lawmakers have only tiptoed around questions surrounding how triple-A rated derivatives could have been packed with chunks of paper backed by subprime, or junky mortgages.
But in Europe, even the continent-wide August hiatus hasn't stopped calls for more regulation of U.S. derivatives.
In the French press, where the whole mortgage mess is dubbed l'affaire subprime, President Nicolas Sarkozy wasted no time in calling on the European Union and the G-7 to look into greater regulation of derivatives and the U.S. ratings agencies.
Indeed, EU representatives are now slated to meet with the ratings agencies later this month.
And no wonder. Experts estimate that European banks hold about one-sixth of all the subprime paper out there. How much the Asian banks were at risk was unclear, that is until Friday when markets across the Pacific were rocked by word that the Bank of China - that country's state-owned bank - was up to its ears with $11.5 billion in messy U.S. mortgages.
Sure, the ratings agencies and Wall Street banks have felt the heat before, especially in the wake of the Enron and WorldCom bankruptcies.
But this time the stakes are much higher. Not only did the ratings agencies work in tandem with big U.S. banks to structure many of these mortgage-backed securities, the derivative business represents a huge chunk of their profits.
To think that the European and the Chinese banks are going to keep on buying our derivatives without serious reforms is not only naive but foolhardy as well. |
