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Importance of What was Presented
The situation in the documentary dealt with the economic risks attributed to the lack of regulation surrounding Over-the-counter (OTC) derivatives. An OTC derivative is, basically, a complex financial contract that is traded between two private parties without them having to go through an intermediary or an exchange system. One of the most common is a forward rate agreement which enables businesses to set an exchange rate for current or future transactions regardless of the changes in the financial market. This is a tool often utilized by importers and exporters to deal with the inherent volatility of different currencies. However, while OTP derivatives are a useful tool, problems occur when companies and financial institutions create exotic derivatives that are hard to understand yet are publically traded. For example, a company can sell a derivative as a form of insurance against potential faults in an investment. The problem with this process is that, due to the lack of regulation, companies can create as much of this type of derivative as they want without minimum capital requirements. As a result, if a company were to insure the success of a particular stock and that stock plummets, they are obligated to pay the company they sold the derivative to. Unfortunately, as seen in the documentary, if a company does not have enough assets to cover the amount necessary and they sold that same derivative to several other companies, this can create a systemic problem that could cause severe damage to a financial system. It is due to situations like this that proponents of OTC derivative regulation, like Brooksley Borne, advocated for the implementation of more extensive regulatory practices to prevent a possible economic collapse in the future. [“Write my essay for me?” Get help here.]
When looking at why regulatory practices were not implemented when they were needed, much of the blame can be attributed to Alan Greenspan, Bob Reuben, and Larry Summers. These three individuals, at the time, influenced numerous aspects of America’s policies when it came to trade and regulatory action. It was their belief that the government should have as little influence as possible on the markets since, in their words, it can “police itself,” so to speak. Unfortunately, as seen in the case of the 2007 financial crisis which was traced to a lack of regulatory action, greed, and ineptitude; this event almost destroyed the economy and revealed that the market cannot be trusted to limit its own actions. Present day foresight enables us to state that their influence on regulatory policy should have been questioned; however, during the mid to late 1990s, the U.S. economy was booming with much of its success being attributed to the philosophy of noninterference by Greenspan, Reuben, and Summers. As such, yes it can be stated that these influences could have been better controlled based on what we know now, but back then it is unlikely that any form of control could have been implemented given their credibility and the performance of the economy.
The Major Players
As explained in the previous section, the major players that prevented many of the necessary policies for OTC derivative regulation were Alan Greenspan, Bob Reuben, and Larry Summers. Their behavior could have been more productive if they had taken a look at the facts and done an objective examination of the proposals and evidence submitted by Brooksley Borne instead of outright dismissing her claims and limiting the powers of her position as much as possible.[Need an essay writing service? Find help here.]
Impact on Financial and Other Important Risk Considerations
The current problem that impacts financial and other risk considerations is the potential for another disastrous meltdown in the market. The lack of regulation on OTC derivatives continues to this day and the market, apparently, has forgotten about their potential consequences. This can be seen in the creation of derivatives that focus on the predatory car loan industry which shares many similarities to the housing bubble that caused the 2007 economic crisis. If the lessons of the past are not remembered, and there continues to be a lack of sufficient regulation, then it is likely that there is a significant amount of risk in operating in such an environment.
Concerns for Financial Markets
The primary concern for financial markets is the implementation of draconian regulatory practices on OTC derivatives which could cause problems for many companies that rely on this instrument for trade. Aside from this, the continued creation of exotic derivatives is equally worrying since it is likely that this may cause another meltdown in the future.
How I would have handled the situation
If I were in the shoes of Alan Greenspan, Bob Reuben, and Larry Summers, I would have looked at the evidence presented by Brooksley Borne regarding the risks associated with OTP derivatives before dismissing them outright. The biggest problem with what they did was they failed to act objectively and thought more with their egos rather than their intellect. Unfortunately, the U.S. economy paid the price for their arrogance which resulted in hundreds of billions of dollars being spent to absorb the sheer amount of financial losses generated by the market.[Click Essay Writer to order your essay]