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CCCA_V5No2_Q&A_ARSorkin-FIN.qxd:CCCA_V1No1_DriversSeat-FIN.qxd to the Swiss banks and, of course, they have Tier 1 [capital crucial to reducing risk. 5/6/11 12:26 AM Page 39 Feature ARS: Of all the things that weren’t addressed properly, it’s deriv- levels],which is fantastic.But watch.You’re already hearing atives. First of all, nobody really took on the issue of stories about Swiss banks saying “Maybe I shouldn’t be whether derivatives are practical and useful to begin with. based in Switzerland anymore.”So the regulatory arbitrage Are there derivatives that should not exist in life? Should I begins anew. be able to buy insurance on your house if my only goal in life is to burn your house down? Does a synthetic CDO So what can the Federal Reserve do? Does it even have make sense? Does that actually have any practical value to the tools to address this issue? society? I think not. I think we’ve all recognized that it ARS: I think that it could [use them] if it wanted to. It can do doesn’t. It doesn’t mean that people won’t do it in the stuff around the edges. It can monitor the companies. On future. Do derivatives help airlines [to hedge against a one-on-one basis, it can actually get some people in changes in jet fuel prices]? Maybe.By the way,half the time there and see what’s really going on. I mean the sad part is they’re getting it right, half the time they're getting it that’s what happened with Lehman Brothers.We had reg- wrong. But there’s a social purpose issue, which I think we ulators in the building, and yet, they didn’t see it. Or they need to address because derivatives that don’t have a social didn’t do enough about it, and the question is, how pro- purpose typically have more risk involved. active do you want to be? Greenspan, I think, is probably making the argument you can’t So how should we deal with be pro-active and that’s proba- derivatives? [T]he main point bly the wrong answer. ARS: I think the more you put “ of the financial crisis them on the exchanges How long do you think the and get some trans- is that this is all about list of systemically impor- parency around them, only one issue: tant institutions should be? the better off you are. And should we be doing But ultimately, the main Debt and leverage, more to monitor risks relat- point of the financial period, full stop. ed to shadow banking activ- crisis is that this is all ” ities like hedge funds, money about only one issue: market funds and insurers? Debt and leverage,period,full stop.You can have all the bad ARS: Right now we have 10 institutions,with 77 per cent of the derivatives or all the best derivatives in the world.You can nation’s banking assets.That’s reasonable to go after those have regulators not minding the store; you can have ten. But we used to have the opportunity to have insight bankers,Alan Greenspan, housing policy. It doesn’t matter. into what was going on at the arbitrage desk at Goldman If there’s too much leverage in the system, you’re creating a Sachs. Now that it’s moved to [private equity firm] KKR, problem. If there’s not that kind of leverage in the system, we actually don’t.What does that say? Have we moved all you can still have all these bad actors running around in cir- of this off balance sheet? We have moved all this risk into cles without creating such a horrific problem. places where we might not be able to see it in the same way, like in hedge funds.Where are all the ‘smartest guys in the Should we be regulating debt and leverage? room’going?They’re going to hedge funds that are not reg- ARS: I’m not sure.Then the question becomes, are the Fed and ulated in the same way.So then the question is how do you other central banks taking the appropriate steps? I don’t control that? Do you then want to go and regulate hedge think they’ve gone far enough.The problem though is we funds? That may be the next step in all of this. all want a global regulator. But go and look at the banks in Europe. If they were to have the capital requirements that What about shareholders? What role do they have to play you'd want them to have, governments would have to in this? pump money into every single bank.So you’re sort of con- ARS: This has been driving me crazy lately. With manage- strained. In a way, the U.S. banks were actually over-capi- ment, aggrieved bankers, regulators and everybody else, talized on a relative basis to European banks.Then you go we rarely blame ourselves. We want more and more ÉTÉ 2011 CCCA Canadian Corporate Counsel Association 39