Why Derivatives Are Taking a Drubbing

More

You might have expected Congress to muddy financial regulation with carve outs and compromises that water down the Senate bill. But it hasn't worked that way for derivatives. Sen. Blanche Lincoln proposed a super-tough plan that would force financial institutions to split in two if they want to keep trading these complex instruments that help financial institutions hedge other bets, and it hasn't attracted much negative attention on Capitol Hill -- even though some politicians do whisper quietly that it might be a little too strong.

Noam Scheiber explains that the White House recently recognized that derivatives were the perfect public relations weapon to wield in the run-up to financial reform. "Rahm's view is: 'I like the derivatives issue,'" one administration official told Scheiber. "We're on better ground on that than talking about bailouts. If they talk bailouts, we talk derivatives."

How did derivatives help make financial regulation stronger? Maybe it helps that nobody knows what the heck they are. Kevin Drum has a smart take:

If you propose an agency that's going to regulate consumer credit, it's entirely possible to get the citizenry riled up about it. You make some arguments about how it will make it harder to get a home loan or qualify for a credit card or something like that. People get that...

But derivatives? It's the fact that they're arcane that makes them such a great target ... From a pure PR perspective, the very fact that derivatives are (a) arcane and (b) solely the preserve of gigantic Wall Street firms make them a perfect target.

Financial regulation is extremely complicated. Remember, we're in this mess partly because Wall Street didn't fully understand the risks of its shadow banking system. It's easier to message the public about leverage (The banks are too big!) or the resolution fund (Bailout fund!) than derivatives (Hey folks, credit default swaps are just like your home insurnace, except! Instead of you taking out insurance on your own home, it's our swap desk taking out insurance on a security backed by the mortgage on your home.) And it's easier to build a campaign against something you can package in a few words.

Jump to comments
Presented by

Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

Get Today's Top Stories in Your Inbox (preview)

When Will Robots Take Over the World?

"In a sense, we're already becoming cyborgs."


Elsewhere on the web

Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register. blog comments powered by Disqus

Video

Is Wine Healthy?

James Hamblin prepares to impress his date with knowledge about the health benefits of wine.

Video

The World's Largest Balloon Festival

Nine days, more than 700 balloons, and a whole lot of hot air

Video

The Origins of Bungee Jumping

"We had this old potato sack and I filled it up with rocks and dropped it over the side. It just hit the water, split, dropping all the stones. And that was our test."

Video

Is Trading Stocks for Suckers?

If you think you’re smarter than the stock market, you’re probably either cheating or wrong

Video

I Spent Half My Life Making a Video Game

How a childhood hobby became a labor of love

Writers

Up
Down

More in Business

Just In