Big Business Economy PoliticsWritten by Dennis Hollier On 30 September 2011
Exotic Financial Instrument Redux

After the Lehman Brothers debacle, the sub-prime mortgage crisis, the exploding bubble in exotic derivatives, and the consequent collapse of the credit markets, it’s tempting to assume that the financial world has come to its senses. Surely, the wise men of Wall Street have set aside the Rube Goldberg approach to making a fortune.

Every now and then, though, we get subtle hints that, despite the damage they’ve done, the complex machinations of Wall Street persist. Since the economy melted down, for example, the mortgage on my house has passed through the hands of four different companies. Just like old times. Maybe that’s a sign the mortgage industry is putting its house in order, hacking out the deadwood of Countrywide, for example, and gradually dovetailing in the good hard oak of Bank of America. But I doubt it. I’m more inclined to think it represents a kind of recidivism, a return to the commodification of mortgages, one of those brilliant financial gambits that made Wall Street billions of dollars – before it brought the world’s economy to its knees.

This morning, I received notice that SEFCON II – the second annual Swap Execution Facility Conference – will be held in New York on Monday . Make sure to mark your calendars. According to the notice: “The conference will include demonstrations of trading platforms for interest rate and credit derivatives, fixed income, money market products, foreign exchange, energy and equity derivatives.” Just reading the jargon can make you nostalgic for the pre-bubble heydays of financial engineering (a real term, I promise.) Can the return of credit default swaps and the bundling of commercially backed mortgages be far behind?

Of course, the whole enterprise could be just the kind of introspection the financial industry needs. The Wholesale Markets Brokers’ Association, which is sponsoring the conference, bills it as way to promote the “quality and standards of the industry,” and who am I to gainsay them. In their media announcement, they say: “The day-long conference will examine the role and operation of Swap Execution Facilities (SEFs) under the Dodd-Frank Wall Street Reform and Consumer Protection Act and feature participants from leading inter-dealer brokers (IBDs), exchanges and wholesale financial markets as well as regulators and senior policy makers.”

That doesn’t sound so bad. Surely there’s nothing wrong with a regular intercourse between major brokers and “regulators and senior policy makers.” After all, the conference is simply a public discussion of new laws and regulations. (“Cost: free to media.”) So maybe it’s just the vocabulary that makes me uneasy. Or maybe all these exotic financial instruments were unjustly maligned. Just the same, the arrival SEFCON II has me checking my mail for the notification for the annual conference of grifters. See you there.



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