The Great Debate

Gary Gensler -- regulator and, yes, Goldman alum -- has distinguished himself in Washington. As CFTC Chairman, he's fought to impose stricter rules on OTC derivatives and recently proposed rules that would cut the leverage currency traders are allowed to deploy from 100:1 to 10:1. Lest we all forget how dangerous leverage can be when traders misuse it, there's LTCM to serve as exhibit A. In a clear sign that Gensler is fighting the good fight, traders are screaming about the proposed rule. Fantastic.

From Carolyn Cui and Sarah Lynch at WSJ: Foes take on leverage curbs from CFTC

An attempt by regulators to protect investors from volatile global currency markets has triggered an uproar among lawmakers, currency dealers and thousands of small traders.

The Commodity Futures Trading Commission has proposed rules that would reduce the amount of borrowed funds that retail investors can use when investing in the U.S. foreign-exchange market to as much as 10-to-1, from the existing 100-to-1 for major currencies.

Under current rules, a customer putting up a security deposit of $1,000 in cash will be able to trade a notional amount of $100,000, a common contract size for currencies such as the dollar and the Japanese yen. The new rule would cap that amount at $10,000.

The rules also would require dealers to abide by new capital and disclosure requirements.

Our recent post on the End of Capitalism triggered much interest and comment.  There were plenty of diverse views, as one would expect. But one thread that came out was that what we are now seeing is not true capitalism (nor, of course, is it old-style communism). Ok, but what is it?

Anthony Conforti suggested in a comment that we need a name for what is happening,:

The first step in defining a new economic paradigm is coming up with the proper terms…new words to define a new economic environment. As words, “capitalism”, “communism”, “socialism” may now be inadequate to describe the emerging economic reality. We need new nomenclature. Any thoughts?

By Peter Thal Larsen and Rolfe Winkler

LONDON/NEW YORK, Oct 5 (Reuters) - Of all the reforms proposed by global financial regulators over the past 12 months, none looks as appealingly straightforward as the leverage ratio. What could be simpler than linking the total amount of assets a bank can hold to the amount of capital it has to absorb losses it makes on them?

Alas, such a task is more difficult than it appears. There is little international agreement about how to calculate banks' assets or capital, let alone what the ratio between the two should be.

A few years ago, even the idea of such a simple measure seemed hopelessly out of date. Banks were busy building sophisticated computer models to measure the risks they faced. They were allowed to tweak the amount of capital they held against assets depending on how risky the computer thought those assets to be. Then those models failed.

The people who brought you the Long-Term Capital Management debacle want banks to get serious about cutting their own leverage, applying fair value accounting to a wider range of assets.

Writing with two colleagues in the Financial Times on Tuesday, Nobel Laureate Robert Merton said banks, their regulators and legislators are conspiring to conceal depressed asset prices in order to avoid dealing with the consequences of insolvency. He wants wider adoption of fair value accounting to force banks to fess up to losses and raise more capital.

Speaking on Bloomberg radio, Merton’s long-time associate and fellow laureate, Myron Scholes, concurred.

Dean Wright is Global Editor, Ethics, Innovation and News Standards. Any opinions are his own.

The global financial crisis may have drained the coffers of investors, businesses and nations, but it’s making our language a bit richer as we discover, revive, coin and develop words and phrases to help make sense of it all.

Some take hold quickly and spread far and wide. “Bailout,” naturally, was voted Word of the Year for 2008 by the American Dialect Society and by Merriam-Webster and was No. 2 on Time’s “Top 10 Buzzwords” (a list that also included “staycation,” a frugal vacation spent close to home). Interestingly—and predictively, as it turned out—the dialect society’s 2007 Word of the Year was “subprime.”