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5 April 2012
SocialFunds: Academics Propose Agency to Regulate Financial Products
Source:
www.socialfunds.com
by Robert Kropp
Eric Posner and Glen Weyl of the University of Chicago state that a Financial Products Administration would be the Food and Drug Administration of financial derivatives.
SocialFunds.com -- "ICCR members…began sounding the alarm about the dangerous risk-taking of 'too big to fail' banks a decade before the crisis," the organization states in the most recent edition of its Corporate Examiner. Years later, ICCR members and other sustainable investors are still at it; resolutions filed for this year's proxy season at four major banks request greater transparency around repurchase agreements, which, the filers state, "create a large quantity of highly leveraged transactions for individual firms and the overall financial system."
More than a decade of filing non-binding resolutions that are certain to be opposed by management—and thus, by a majority of institutional investors as well—requires great expenditures of effort and expense. The more direct path, when it is possible, would be to effect legislative and regulatory reforms. As Lisa Woll, CEO of US SIF: The Forum for Sustainable and Responsible Investment, stated at last year's SRI in the Rockies conference, "We could spend the next 40 years getting companies to have better carbon footprints and doing less damage to the climate, or we could get a bill that addresses it."
The same, of course, goes for financial reform. In a recently published paper entitled An FDA for Financial Innovation: Applying the Insurable Interest Doctrine to 21st Century Financial Markets, authors Eric Posner and Glen Weyl of the University of Chicago propose the formation of a Financial Products Administration (FPA), which, they write, "would approve financial products if they satisfy a test for social utility that focuses on whether the product will likely be used more often for hedging than for speculation."
"Our proposal is not as radical as it might seem at first," the authors argue. "Our main goal is to regulate a form of speculation or gambling that takes place in financial markets." Applying the legal doctrine of insurable interest, the authors further argue that financial products such as naked credit default swaps (CDS) and derivatives would likely be viewed with skepticism by an FPA.
"The FPA would be the FDA (Food and Drug Administration) of financial derivatives," the authors state. "The inventor of a financial product will not be able to sell it to the public without first submitting an application to the FPA and receiving approval."
"Before there was an FDA, quacks peddled useless, and sometimes dangerous, tonics like radium water," the authors wrote in a recent Bloomberg op-ed. "Yet for all the harm such concoctions caused, they may never have matched the risk and waste of some financial derivatives -- what Warren Buffett has called 'financial weapons of mass destruction.'"
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SRI-Adviser: Top Sustainable Investment Stories of 2010
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Sustainable Investment Research Platform
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