President Obama wants to curb the habit of risk taking at banks or, perhaps, eliminate much of it completely. One Administration official told Reuters, “The proposal will include size and complexity limits specifically on proprietary trading and the White House will work closely with the House and Senate to work this into legislation.”
As time passes on Wall St. it becomes more difficult to define what a risky financial instrument or practice is. The ways that bankers make money evolves each year, each month, each day.
Mortgage-backed securities, which did not much damage to balance sheets and the credit markets, where clearly more complex and risky than Wall St. understood. So were auction rate notes that were sold as equivalents to cash. But, bankers conduct a number of transactions each day using exotic trading techniques and complex financial instruments. Does the government ban all of those?
All derivatives are complex compared to stocks. Airlines use them to hedge oil prices. Others are used by agribusinesses to hedge gain prices.
Credit default swaps allows traders to create a system for setting the value of debt. They offer a way to hedge against the potential collapse of the financial system in places like Greece or in companies that have shaky balance sheets.
Collateralized bond obligations are an investment-grade bond backed by a pool of low-grade debt securities.
A walk through a dictionary of Wall St. terms does not solve the problem of which instruments are “too risky” and which are not. But, to take away an airlines chance to hedge its fuel costs would cost that airline tens of millions of dollars.
Douglas A. McIntyre
Top Gaining Stocks
Top Losing Stocks