The near bond forfeiture -induced collapse of Greece ('Greece Shows the Need for Overhaul in Derivatives, Wall Street Journal, Feb. 16, page C10) shows it's time to get serious about roping in bank speculators and holding them accountable. The time for arrant speculation, especially in a volatile, uncontrolled $605 trillion derivatives market is now overdue.
As the WSJ piece (graphic) shows, the exposure of Goldman Sachs alone (to derivatives as a percentage of capital) is now 858%! Consider that and process it! 858% That means that for every dollar of capital Goldman is holding, $8.58 is going out toward speculation in derivatives, especially CDS or credit default swaps which up to now haven't been tamed - as in placed in a sequestered exchange and monitored.
This means we are headed directly toward another massive breakdown of the financial system unless wiser and more mature heads prevail- like Paul Volcker (the former Fed Chairman during the Carter and Reagan years).
In the "Volcker Rule" - described in The Financial Times (Feb 15, 'Goldman Faces Stark Choice on 'Volcker Rule'), the banks either have to make do with no "proprietary trading" (such as in the risky derivatives market) or they will cease to be afforded the protection of the government, including the Federal Reserve - which will entail:giving up federal deposit insurance protection, as well as any Federal Reserve bail outs for misguided moves. As Volker put it, quoted in the FT piece:
"Don't expect the support you would get from being a bank within the club of insured deposits, and access to the Federal Reserve and all the loving atention you get as a banking organization"
In the meantime, until the rule is imposed, other measures can be taken - and must be - as indicated in the WSJ article:
1- All CDS pricing and volume need to be made public
2- All OTC (over-the-counter) derivatives need to be centrally cleared. This will lead to proper margin payments to all parties.
By contrast, in the massive credit meltdown that preceded the 2008 financial crisis, no one knew the price of any given credit default swap, and counter party risk (for those holding them) went to astronomical proportions, estimated as much as $55 trillion in CDS debt outstanding. This led to hundreds of banks holding worthless paper, causing them to essentially cease all lending transactions.
If banks want to gamble with depositors' money - then bring down the hammer. Cut off all support from the Federal Reserve.
As we see again from all these backroom dealing hijinks, placing nations at risk, the banks need to be placed on a short leash. And in the U.S., the Glass-Steagall (1935) law that had previously separated the investment banks from deposit taking banks - never should have been repealed.
Let's hope that between them, Paul Volcker and Barack Obama can get this mess sorted out and stabilized. Otherwise, there may be no way to contain or resolve the next financial casino-driven calamity. After all, taxpayers are only going to allow so many of their dollars to be snuffed out for bank (or insurers' - like AIG) bailouts!