A Blind Hog and a Turnip

An old boss of mine used to talk about how even a blind hog could find a turnip once in awhile. I think this is an apt comparison to the latest coming out of the Treasury. I think they finally got something right:

The vast majority of complex and opaque over-the-counter derivatives must be traded on centralized clearinghouses, the Treasury Department recommended on Wednesday as part of its regulatory reform effort for exotic financial products.

"As part of our comprehensive reform effort, we are laying out a framework for oversight for the derivatives markets," Treasury Secretary Timothy Geithner said.

I've pounded Geithner for months but on this I think he's correct. Derivatives create an layer of risk and complication to the market that is very difficult for the average investor to understand or price into their investment decisions.

The Treasury, the Securities and Exchange Commission and the Commodity Futures Trading Commission proposed having standardized credit default swaps and most derivatives traded through clearinghouses. The government regulators made a host of other recommendations, however legislation would need to be crafted by Congress for the Treasury proposal to become a reality.

Traders could also be required to keep capital in reserves to cover losses. Specifically, the proposal also calls for derivatives dealers to maintain conservative capital standards, tougher risk controls and proposes new business conduct guidelines.

The parts I like are the trading desk, which will give transparency to the pricing of these securities and the requirement to keep capital in reserve to cover losses. Both of those would have gone a long way to preventing the melt down we saw happen last fall.

I'll hammer Geithner will glee every time he screws up, and I still think he's a clown, but this time he got it right.