Ok, ignoring my own posts, please refute the argument as presented by Zerohedge. Why is it wrong?
As I explained, ALL of the derivative market is DEFINITELY NOT SPECULATIVE, but a very legitimate means of REDUCING RISK, not assuming more risk. Most often, this involves a hedge to protect against interest rate risk where a bank is exposed to an increase or decrease in interest rates for a class of assets or liabilities that they have on their books that got there in the normal course of lending money and/or taking deposits. THAT, in my view, is what the legislation is saying as posted in the article. There is not one thing under the sun wrong with that. To the contrary, it is a good and acceptable business practice and is the polar opposite to speculative derivative and swap trading. What often happens is that another entity needs to hedge in the opposite direction, so the transaction reduces risk two the entities on each side of the swap or derivative. A swap in that case is mutually beneficial: they BOTH get something positive out of the transaction.
Again, derivatives used to move a lender’s credit risk off its balance sheet is not a good thing. The reason: there is no way for the entity assuming the credit risk to lay it off, like a bookie does, other than by passing it along to another entity at a fee spread. Somebody ALWAYS takes the loan loss, which is never good. As with AIG, they assumed more credit risk than they could handle. Then, when the economy fell apart, loans started going bad right and left and AIG and others could not cover the credit losses that they effectively guaranteed for other banks. That part of the derivative market, in my opinion, should have been killed and AIG should have been allowed to fail.
However, NOT ALL DERIVATIVE OR SWAP TRANSACTIONS ARE CREATED EQUAL. Some uses are effectively gambling (credit guarantee derivatives) and some uses are very good business practices. It is the same logic as why we don’t outlaw cars because someone gets killed in a wreck. The problem comes when the taxpayer has been covering the risk from SPECULATIVE transactions, which is stealing from the taxpayer. I have no problem limiting speculative transactions, which is what traditional bank regulation has done.
Using derivatives and swaps for banks and insurance companies to hedge and reduce interest rate risk absolutely should be permissible, as the excerpt posted indicates in my reading.