IS THE U.S. ABOUT TO BECOME A
GLOBAL FISCAL TERRORIST?
Derivatives as Weapons of Mass
By Tom Plate
April 23, 2004
LOS ANGELES — Deliberately
injecting a new dollop of uncertainty into the already-shaky international
financial system, it seems to me, has got to be the white-collar
dysfunctional equivalent of dropping a pair of terrorism car bombs on the
steps of some nation’s central bank.
Yet this, in effect, is precisely
what leaders of the New York Stock Exchange are proposing, however
unintentionally, if, as seems probable, they proceed to sanction derivative
funds as official products of the exchange.
A final decision to do so would be
morally inexcusable and in all probability injurious to global economic
Derivative funds are a relatively
new way to invest. Important as they have become, they are very difficult to
define exactly, but (as one saying goes) you know them when you see them.
They are sort of kissing cousins to giant hedge funds, sort of like very
large insurance policies that are more or less constantly in motion --- a
kind of radioactive hedge or insurance fund, say.
And they are the logical product
more of the dazzling technology of our globalized age, with its lightening
fast computer transmission and instantaneous information technology
capabilities, than they are of a neatly rational, easily understood
investment, such as buying a stock or government bond.
Moreover, as complex (and a bit
mysterious) as they are, even the average small time investor (like me),
with his or her IRA, mutual fund and what not, may unknowingly have put a
small slice of their investment in derivatives. The global result is that
derivatives funds tend to be of enormous size, with tremendous potential to
generate great harm as well as massive profit.
Asia needs to be especially wary of
the derivatives development after what happened during the 1997-99 regional
financial scare. Western hedge funds of enormous magnitude, moving with the
speed of light and the stealth of terrorists, exacerbated that unforgettable
crisis by speculating against (in effect, serially shorting) weak national
currencies and roiling national equity markets. The net effect was to turn a
4.5 earthquake problem into something like a 7.0 catastrophe.
Rocked to its core, Asia fought
back by either accepting severely conditioned bailout billions from the
Washington-based International Monetary Fund or, as with Hong Kong and
Malaysia in particular, implementing their own radically protective
responses. The region survived, obviously, but the experience was very
scary, something that no one wishes to go through again.
But the derivatives development
poses a new threat of a similar or greater magnitude, which is why this
category of financial instrument has already drawn its share of critics.
Notable among them is billionaire
investor Warren Buffet, who recently described derivatives as “financial
weapons of mass destruction…We view them as time bombs both for the parties
that deal with them and the economic system, … carrying dangers that, while
now latent, are potentially lethal.” Another widely respected financial
figure, though he doesn’t appear to share Buffet’s negative view, has warned
that especially diligent financial monitoring will be needed if derivatives
are to become a healthy new coin of the investment realm. That very
cautionary note came from none other than Alan Greenspan.
The argument for officially listing
derivatives on the NYSE, one presumes, is that it would simply recognize the
growing reality of derivatives and provide a more regulated environment for
the inevitable. But this argument would be far more convincing if those
massive Western speculative funds that ravaged Asian currencies and stock
markets just a few years ago hadn’t had deep origins in, and direct links
to, the very pristine sanctuary of the NYSE itself.
And this argument withers to
near-hilarity when one considers recent history, such as the world’s
emerging sense of the true moral climate of the NYSE. Consider the global
outrage when the world learned that nearly $200 million in compensation had
been paid to NYSE Chairman Richard Grasso, now forced into resignation.
Indeed, a deeply embarrassed NYSE is trying to get some of that compensation
Consider the collapse, like the
proverbial house of cards, of once magisterial Barings Bank, in part due to
overexposure in speculative derivatives. Or the dirty side of derivatives
revealed in the scandals of Enron (2001), Long-Term Capital Management
(1998) and Proctor & Gamble (1994).
Even defenders of derivatives, who
make the case that they are not inherently evil, have to admit that the
amount of actual social good produced by them is difficult to discern. They
exist primarily for the purpose of profiteering, and thus are driven largely
greed rather than social conscience.
Properly harnessed, human greed can
produce great wealth that can ultimately become a powerful force for the
common good. But derivatives are so complex that they are difficult even to
define, much less harness or manage responsibly. Were it possible to contain
the explosion of derivative investment within the United States, the NYSE’s
evident inclination to officially list them perhaps could be justified. But
in an age of intimate economic globally interconnectivity, the NYSE has no
right to inflict the risk of them on the rest of the world. America already
has plenty of ways of making money without them.