An article in the Financial Times on Monday offers advice to the financial services industry on how to maximise profits in the face of financial regulation.
The article is titled: “How to maximize profit with derivatives.”
In the article, former chief financial officer of JPMorgan Chase (JPM) John H. Mackin, former chair of the Commodity Futures Trading Commission, and former Treasury secretary Henry Paulson argue that the biggest risk facing derivatives is that they will become “a tool for oligopolies to manipulate prices and to squeeze companies and consumers out of the marketplace.”
“The biggest risk is that the financial system itself will become the lever to push markets higher, and then the risk is even greater that the price of the product will not reflect that,” Mackin said.
“We are seeing a rise in the use of derivatives and the use that we are seeing of them to create huge price increases that will be the result of the price manipulation.
The only way to prevent this is to have a regulatory regime that does not allow this,” Mackins remarks.”
So the question is, how do we prevent this?”
“How do we stop this from happening?”
“The best way to do it is to do what we did with derivatives.
We have a regulation that is designed to stop this.
We need to stop it.”
Mackin said the “only way” to stop derivatives is to “keep them out of markets and out of government control.”
“But to do that, we need to have the government regulate them,” he added.
“And we need regulation that prevents this from occurring.”
The article points out that the use and misuse of derivatives by governments and central banks have increased dramatically in recent years.
As of April, the United States alone had used more than $200 trillion in derivatives, which has created a “financial system of unprecedented complexity,” according to the article.
“The US is now the world’s second largest user of derivatives after Japan, with $1.3 trillion of derivatives on hand.
This is a staggering number for a country of just 5.3 million people, and has resulted in massive distortions in markets and in prices of goods and services,” the article said.
“More importantly, the amount of money at risk has increased significantly in the US, as derivatives have been used to hedge against price fluctuations and to facilitate speculation.
It is difficult to see how this would not lead to greater financial instability.””
So what we have here is a financial system that has become a massive instrument for oligopoly,” Mackinson said.