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Good afternoon. It is a pleasure to be with you today. I’d like to thank the Consumer Federation of America for inviting me to speak today and for all the work CFA does to protect consumer and investor interests in America. I recall working hand-in-hand with this organization on consumer privacy in the 90s and again with you to protect investors with the Sarbanes-Oxley Act. Today I’d like to speak to you on the need for comprehensive reform of over-the-counter (OTC) derivative markets.
Last year’s crisis marked a defining moment in our nation’s history. We have all witnessed firsthand the effects that it had across the entire economy. Everybody in this room put money into a single company that was so interconnected with other financial institutions that its failure threatened the entire system. $180 billion of taxpayer money went into AIG. That’s about $600 from each person in this room or nearly $414 million per Congressional district. The crisis was a call to action to ensure that we do all we can to prevent the financial system from so undermining the economy and the wellbeing of the American public.
Though there were many causes of the crisis, the unregulated over-the-counter derivatives marketplace certainly played a central role. Derivatives are contracts used by corporations, municipalities, nonprofit organizations and others to protect themselves from the risk of a future change in markets. Retailers, for example, use derivatives to hedge the risk of currency fluctuations when importing products that consumers will purchase this holiday season. Oil producers use derivatives to lock in the price of oil for future shipments. Local fuel companies use derivatives to lock in the price of winter heating oil for their customers.
The Commodity Futures Trading Commission currently regulates certain derivatives, called futures. Many other derivatives, called over-the-counter derivatives, however, are traded out of sight of federal regulators and out of sight of market participants. These products were at the center of the collapse of Lehman Brothers and the bailout of AIG.
Derivatives play an enormous role in our economy. In America, their total value is based on a dollar amount nearly 20 times the size of our economy. The arithmetic would suggest that, on average, a $50 tank of gas could have as much as $1,000 in derivatives somewhere associated with. The arithmetic also would suggest that, on average, a $200 iPod could have $4,000 in derivatives behind somewhere associated with it.
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