I just want to share some insight about regulation in the financial sector. I worked on Wall St. during the 1980’s, in fact I worked at Bear Stearns which if you’ve been following the whole financial debacle of the past year, you know what happened to them. They were one of the most successful pioneers of derivatives. What derivatives are are securities that are based on other securities such as mortgages. What Bear Stearns did was to buy mortgages from mortgage consolidators such as Freddie Mac and Ginnie Mae. Because mortgages as a financial instrument are very unpredictable because you never know whether someone is going to live in a house forever and pay off the whole mortgage over 20 or 30 years or sell the house and pay off the mortgage. Such uncertainties drastically affect the actual value of the mortgage over time. So what Bear Stearns did was to create a secondary instrument that would contain for instance, all the first year payments from 100 mortgages. Because they have statistical data on prepayment of mortgages, having many mortgages in the instrument allows it to be more statistically predictable. So what happened on Wall St. is that the brokerage houses created these derivatives and sold them to investors many of whom were banks.
Continue reading "The Issue of Regulation in the Financial Sector" »
