Blogs & Comment

Time out for a lesson in transparency

Okay, Ive finally got the password and the permission to go ahead with this new blog. And so here we goa dedicated attempt to chart the emergence of the new financial services industry that is necessarily going to grow out of the mess were in now.
Of course, weve got to get through the mess at hand first. And it looks like weve got a way to go yet on that point. CB Online editor Samson Okalow suggests keeping an eye on upcoming settlement dates on credit default swaps on Lehman Brothers debt, an excellent idea.
These swaps are basically default insurance, and there is a major chunk of change to be paid out on the $125 billion in Lehman debt that went down with that good ship (up to 90 cents on the dollar apprently).
That’s a mighty bit of cash set to shift from institution to institution on October 23rd, a major settlement date for these contracts.
But let’s take a moment to learn a lesson here. As we are all now well aware, the credit derivatives market developed over the last decade as an opaque, non-transparent, over-the-counter market, where no one has a clue who is counter-party to who on what terms and why.
Warren Buffett has long warned of the danger of this, as have many others. But as Buffett put it on the Charlie Rose show last night, the economy is a patient in cardiac arrest prostrate on the floor of the hospital. And part of the reason the we’re now tempting economic brain damage was the collective decision to let this derivatives market develop in such an opaque manner.
A good idea floating around in these days of “regulatory rethink” is that credit derivatives should be traded on an exchange and in a more transparent manner so that we know where the landmines are. It’s a basic idea, and had we implemented this earlier we might not be in the dismal state we’re in. So let’s not pass up the chance to learn a lesson here: A key idea going forward is that a little transparency is a good thing. It avoids credit market heart attacks such as the one now threatening to take down western finance.