Derivatives: The Risk That Still Won’t Go Away

We are probably a long way from having these rules, or rea­sonable facsimiles, on the books, and some people question whether they would make much difference anyway. “It doesn’t matter what they do in Washington,” said a New York deriva­tives trader recently, showing Wall Street’s all too common contempt for policymakers. “The smart guys who come out of business school don’t take regulatory jobs there. The smart guys go to places where there are chances to do well. And if there are new rules, the smart guys will just deal with them and move ahead.”

Unfortunately, he may be right. That’s the trouble with genies out of the bottle: They gain a life of their own. Many people, of course, argue that the U.S. lurches into financial crises every so often, and that it is specious to think of derivatives as adding some whole new dimension to the problem. But in fact they did. The financial world lost an anchor when derivatives installed the idea that risk could be shed as easily as it was assumed. We drifted then into an interconnected world of new dangers not easily comprehended or controlled. Fifteen years after Fortune

first used the description, derivatives look even more like the risk that won’t go away.