The derivatives are so complicated that any regulators will have a hard time understanding them: “There’s not a lot of transparency there,” says Starr. “Regulators will not be able to focus on that. It’s a source of concern. We have not adequately come to terms with this.”
More than ten years ago, University of San Diego professor of law Frank Partnoy wrote the first exposé of derivatives abuses, F.I.A.S.C.O.: Blood in the Water on Wall Street. At that time, derivatives were not big potatoes. He admits to being surprised that the notional value has climbed to a quadrillion dollars. In a recent article for the Financial Times of London, Partnoy says that today’s derivatives crisis is similar to that of the 1990s, except it involves much more money. The crisis that forced Orange County into bankruptcy looks small by comparison with the mortgage write-downs of big financial institutions today.
He sees the end of this calamity on the horizon. “We will emerge from this crisis, and then another will hit in a few years,” he says, greatly because of moral hazard: if we keep bailing out the gamblers, they will continue to take egregious risks with borrowed money. For several reasons, including the fact that they are privy to information that others don’t have, Wall Street operators will prosper. “Finance industry employees will continue to outearn just about everybody,” says Partnoy.
Much of their great wealth is coming from you.