Irreverent Economics

Warren Buffet once called derivatives

weapons of financial mass destruction

now he opposes attempts to regulate derivatives, says it would only increase cost of business.

Then his business partner Charlie Munger said the regulators were to blame for the crisis, not the bankers

When the tiger gets out and starts creating a lot of damage it is insane to blame the tiger. It is that idiot tiger keeper that caused the problem and our solution is not to just beat the tiger but efforts to improve the tiger keeper.

Ok, some lack of consistency in this. they say it was the regulators that were to blame, but regulating the “weapons of financial mass destruction” is just too costly, so the government should leave them alone. Methinks Buffet is lobbying to keep the tiger keeper caged. Then the tiger is to blame after all.

OTC products are quite popular. But it is surprising how many friends they have.   The banks of course love them, how could they not prefer instruments that yield fees that are an order of magnitude higher than the standard stuff. And at the same time are opaque.

What surprises me is how attached the clients are to the OTC stuff, see here. One would think that standardized instruments,  sold via a clearinghouse should be much more attractive than the OTC versions. Not only would they be much cheaper, but also the credit risk should be lower. Well, since the government underwrites the banks nowadays the credit element is not there.

Their arguments are that being forced to use non-OTC stuff, is costly and does not allow them to properly hedge.

I would think using instruments on a clearing house and even traded should be cheaper, not more expensive. And maybe the best hedging instruments do not exist right now, but that is because there is no demand. If the only place to get hedging instruments is on a clearing house, then the supply will be there.

Maybe, just maybe, the real reason is that the OTC stuff is less transparent.