Derivatives and Business Ethics
Channel: Sam Vaknin
Date: 2013-06-07

Securitization has led to the emergence of spliced, diced, and sliced derivative instruments whose origin is obscured in pools of primary and secondary and even tertiary securities. Often, the same asset gives rise to conflicting claims by the holders of a bewildering zoo of derivative contracts which were supposed to function as clear conduits, but whose passthrough mechanisms were far from unambiguous or unequivocal. This intentional fuzziness prevented the formation of clearing and settlement houses or systems, exchanges, or even registries, akin to the ones used in the stock markets. The lack of transparency in the derivatives markets was deliberate, aimed at fostering insider advantages in a "shadow system" with "dark pools". Conflicts of interest were thus swept under a carpet of complexity and obscurity. Financial firms traded nostro (for their own accounts) and against their clients. Preferential customers received benefits that were denied their less privileged brethren. Accounting rules were abused to engender the appearance of health where rot and decay have long set in (for instance, high default swap rates -- indicating imminent collapse -- allowed firms to book lower loan loss provisions and show higher profitability!) Agents (executives and traders) ran amok, blindly robbing shareholders in a perfect illustration of the Agency Problem (or agent-principal conundrum).

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