From the December 01, 2010 issue of Futures Magazine • Subscribe!

Outlier rules

imageOver the past few weeks, I’ve had the pleasure of listening to several high-level speakers who have been involved with the financial crisis. Some had ideas on how to get through the economic morass still in place even though the recession is, well, "over." For instance, Robert Rubin, former head of Goldman Sachs and former secretary of Treasury under President Bill Clinton, spoke at the CME Group’s Global Financial Leadership Conference (GFLC), where he focused on the deficit. He noted that it already is affecting business and that the United States needs to "enter into a serious deficit reduction policy." Thus, he isn’t sold on the need for a second stimulus.

Also speaking at the GFLC, former President Bill Clinton focused on the global economy without borders. He noted more specifically that we need to work efficiently on pushing through the rules from Dodd-Frank because markets and businesses are unsure of what impact the regulations will have on them.

At the Association of Financial Professionals conference I heard Condoleezza Rice, former secretary of State under President George W. Bush. Her insights on world affairs and governments were fascinating (see www.buytherumorsellthefact.com
for a blog on her comments). But most interesting was her response to a question on whether the bailout was the right thing to do. "At that time it felt like everything was coming [apart]," she said. "Not only were countries in a panic, no one was lending. Libor was stuck." She went on to say that the bailout was meant to be a "shock to the system to get [the banking system] going again, but, well, it took longer than expected." She added that "maybe some things [we did] might not have been right, but we had to act." Doing nothing at that point in time was not an option, she said.

These are three very smart people providing their views of governmental actions taken during one of the most destructive financial crisises in U.S. history. Contrast their comments with Michael Lewis, author of the "The Big Short," who wrote about the people who actually made money during the crisis. When asked why Wall Street didn’t see this crisis coming, one theory Lewis offered was the "mono-culture of Wall Street." He noted it had become "more sanitized" than when he was at Salomon Brothers. There’s now a conformity of opinion with most firms, he said, in that people who warned of the crisis were shown the door. "No diversity of opinion is allowed," he said. The guys who made the money, those few short sellers, "went against the group think." Showing his own contrarian viewpoint, he also doubted the conclusion of the Securities and Exchanges Commission’s report on the May 6 Flash Crash. "I’m not sure I believe what I’ve read...The (report) explanation doesn’t make sense."

Another GFLC speaker, hedge fund manager Paul Tudor Jones, definitely shook up the crowd when he built a case for stricter price limits. Bringing in examples from the cotton market to E-minis, he noted it might be heresy, but price limits "on all derivatives, futures and options should be reviewed with the intention of narrowing many of them."

Breaking the mold seems to be a theme in our Top 50 Brokers story as well. Due to economic realities, brokers need to be looking for new revenue streams. Our Futures interview with MF Global’s CEO Jon Corzine, who once ran Goldman Sachs and was in the government (see "Corzine plots return to his investment banking roots," by Managing Editor Dan Collins), highlights the need for brokers to diversify revenue streams, build new models and strive for the next level to survive in today’s world. If the crisis of the last two years taught us anything, it is the importance of the two main tenets of trading: diversification and risk management.

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