How did the financial world descend into full meltdown mode last year? Among other things, two factors seem to be at fault: ignoring of history and lack of education, according to John Miller, executive director of the International Center for Futures and Derivatives at the University of Illinois at Chicago. At the Managed Funds Association‘s annual forum in Chicago today, Miller offered an insider’s look at understanding the financial crisis.
Miller discussed how the role of credit default swaps (CDS) created a more lax approach to due diligence and said that a lack of historical analysis played a big part in the meltdown as well. He pointed out that many of the financial products coming into the crisis looked like products offered just prior to the Great Depression. He said that a halo effect on firms like Long Term Capital Management and AIG (supposedly “too big to fail”) also played a role. He noted the importance going forward of central clearing or sufficient collateral requirements for over the counter products, now a hot button issueon the regulatory front in the wake of President Obama’s regulatory blueprint released last week.
Education is key as well. Miller teaches his students what these products are, why they’re traded and who uses them, and, very importantly, how they have performed historically. With more and more regulatory changes coming down the pike from Washington, these sound like points that members of Congress and Treasury would be wise to study too.
Tags: Managed Funds Association, OTC, regulation
