How to regulate the financial sector

 

She has a point, being surprised at the level of public attention JP Morgan received because it lost some of its own money (close to 7 billion in risky investments). But the JP Morgan was upheld as the very last bank that did not make these "risky investment". The surprise of the public is also legitimate, even though it is none if its business.

Her first point, however, on the regulation of CDS, has to be commented. The central argument she is making is that CDS bring valuable information to a lot of market player. That does not say anything about the quality of this information. The spread of Credit Default Obligation (CDO)  is commonly attributed to the development of a mathematical formula called the "gaussian copula", by David X. Li. His formula was quickly adopted by Wall Street, because it gave a convenient approximation of the complex reality behind CDOs. The central problem that lies beneath this issue is to know what kind of information financial market are giving participants. Too much and too complex information can be conducive to a loss of information. That is also the price of complexity. Prices are supposed to be the magic signal making coordination possible. Do prices of all traded financial assets traded reflect truly economic fundamental today ?

More on the Gaussian copula here, and here, and here.