Derivatives need to be traded openly

There is a lot of rhetoric and obfuscation out there as to how to go about regulating “too big to fail.”

A key element is “transparency,” meaning that all derivatives need to be exchange traded so that the values can be openly monitored and marked to the market daily. The Fed could act as a margin creditor by issuing loans to the firms who package these dubious products, and the minute that the Fed's equity starts to disappear, they would force liquidation of the account holdings in a New York nanosecond to protect their position, just like a wire house does with an individual investor. This wipes out the investor, but the house is safe.

The second point is that “reserve requirements” or equity needs to be substantially increased to assure the Fed never could be put in a potential loss position. Think of it like a home loan. You put down 15 percent to buy. If the value of the property falls 15 percent, your equity is gone, but the bank does not foreclose as long as you make the payments. A brokerage house would have demanded that you replace the 15 percent or it would liquidate.

Now the media report that regulators at the Securities and Exchange Commission were spending their workdays in 2007 and 2008 watching thousands of hours of porn on their office computers. I am somewhat reassured they were at work. For a while there, I was afraid my tax dollars were being wasted.

Ronall Wier

North Liberty