Long-time readers know how concerned I have been about the dangers of a derivatives failure, which could cause sudden and dramatic damage to world stock markets.  Investing around derivatives to minimize the danger is nearly impossible because so little is known about the derivatives.  Nobody knows for sure how big the problem is, but it is estimated there are $400 trillion in unregulated derivatives.  There is no “stock market” to capture the needed data.  There is no way to know who is betting how much and on what!  For example, Goldman Sachs might be betting $100 billion on the price of wheat in August, pushing that price up or down depending on what price they want.  Or, how about if they shorted Greek bonds and then their analysts downgraded those bonds?  Do you remember the problems of credit default swaps a few years ago, when investment houses sold mortgage-backed securities to the clients and then shorted them?

The point is that derivatives provide the “big boys” with huge investment opportunities to create “bubbles and busts.”  They are a threat to the long term viability to the world stock markets.  Most of the investment industry has been clamoring for some protection, but not the “big boys.”

When the enormously complex Dodd-Frank financial reform law was passed in 2010, Gary Gensler was Chairman of the Commodity Futures Trading Corporation, where several types of derivatives could be regulated.  In a political environment where any regulation of any thing at any time is bad, Gensler became frustrated and used his administrative powers to implement 68 new rules to govern derivatives.  While some of the 68 rules will probably be just counter-productive window-dressing, it is still a step in the right protection.

Gary Gensler just left office at year-end, and I wish him well.  While many regulations are often unproductive or even silly, blind antipathy toward all regulation is also unproductive but not silly.  Gensler attacked a huge problem that was known only to a few.  As the “big boys” will undoubtedly take all 68 of the new regulations to court, it is unclear that derivatives will be any better regulated than previously, but I am much more optimistic.

Good job, Gary!