Chicago Mayor Richard M. Daley describes the recent economic crisis as more of a restructuring than a recession and wants to “position the city of Chicago to reap the benefits of the better economic times to come.” To do that he has called on leaders of Chicago’s financial trading industry. Daley convened business leaders at CME Group’s headquarters on March 25 to discuss ways the city can continue to help support and grow the industry.
The press conference included a lot of backslapping and a warning that the industry was portable and could be at risk if it was put at a regulatory disadvantage.
While there were dire warnings, the overall theme was positive. Mayor Daley and several industry leaders pointed out that the industry has added jobs in the city in the midst of the current downturn.
This was not the case of an industry holding some government hostage pressing for tax concessions with the threat of a move, it was an attempt to point out the positive growth of an industry while at the same time pointing out some harsh realities.
And there also was an attempt to separate the Chicago financial trading industry from what is often loosely referred to as “Wall Street.”
‘It is worth pointing out that there are some segments of our financial markets that provided a place of shelter for the most damaging parts of the economic crisis, futures and options markets are chief among them,” said CME Group Executive Chairman Terry Duffy. “Futures and options markets functioned flawlessly providing liquidity, transparency and central counterparty clearing that continued to work throughout the crisis.”
James Heinz, managing partner of Chicago based proprietary trading firm Marquette Partners, pointed out that Chicago’s trading community is too often lumped in with those players that contributed to the recent credit crisis.
It has been a pet peeve of mine when analysts or journalists refer to anyone involved in trading activity as representing “Wall Street.” At the risk of being annoying I often correct them with “LaSalle Street” when they are referring to futures traders. Given what occurred during the ongoing financial crisis and how each structure performed, it is more important than ever to point out the distinction.
In the early days of the crisis many experts blamed the subprime crisis on tougher mark to market accounting standards. Banks had to mark their subprime portfolios to markets, something like once a quarter. They argued that this was unfair and that the underlying value of these mortgage backed securities were higher than current market conditions priced them at. All those loans where not going to go into foreclosure. It was jus that no one wanted to buy them anymore. Never mind that is how we value things.
And that is why the large investment banks where reporting quarterly downgrades of multiple billion dollars. After these downgrades were announced leaders at the Fed and Treasury would declare that the worst of the crisis had passed. Then came the next quarter and next round of downgrades.
Perhaps there was some truth to the so called flaws in mark to market when dealing with illiquid securities but it certainly is preferable to marked to myth. And those complaining seemed to miss the most important point, which is illiquidity is the greatest risk of all and must be accounted for.
The beauty of the listed futures markets and central counterparty clearing is that positions are marked to market twice a day. If the value drops below a certain level you get a margin call and if you can’t meet it the clearing member must.
The regulatory structure of the futures industry would not allow the build up of debits—after all most of those mortgage backed securities did not really lose all of their value in one week in July 2007, it only seemed that way.
The odd thing is that it seems that the regulated futures markets are under just as much scrutiny, perhaps more, than the world that created the problems. Despite what seemed to be a sense of urgency at the Mayor’s event, no one cited any particular regulatory proposal or specific threat that had caused them concern. This seemingly was a shot across the bow over any attempt to add cost or constraints on the industry. Given some of the regulatory proposals we have seen since the crisis began, there is a need to separate the regulated futures industry from the investment banking and over-the-counter (OTC) trading world. Too often the discussion of regulation is oversimplified to a matter of good and bad or tough regulation vs. free markets. It is a matter of accounting for risk. The listed futures market does that well. The OTC world doesn’t. They have to start to do it or have it done for them.
Tags: bailout, CME Group, Fed, regulation
