In this post-crisis (or is it continuing crisis?) world, Lloyd Blankfein and Goldman Sachs (a/k/a “The Giant Squid”) may not be considered the most savory company to keep, but that’s where I find myself today. That’s because Goldman CEO Blankfein is also raising the alarm about the systemic risks posed by a vast expansion of derivatives clearing:
“I agree that clearinghouses make things less risky for the regular crisis, but in an extreme crisis that could affect the clearinghouse itself” and it’s “dramatically more risky,” Blankfein said at a finance and regulation conference in Brussels today. “We have to make sure that something that we do to reduce the risk in a once-in-a-20-year storm doesn’t increase the risk in a once-in-a-50-year storm.”
That may be an unintended consequence of the current regulatory push, Blankfein said, adding that clearinghouses themselves will need to be regulated and have capabilities to analyse the risk of financial instruments they clear.
“Otherwise, the clearinghouse becomes the biggest systemic risk in the world,” he said.
I’ve made the point often before, so I won’t belabor it now.* Needless to say, I agree.
Blankfein makes an interesting distinction here: “regular crisis” vs. “extreme crisis.” I can hear it now: “Don’t worry! This is only a mere regular crisis!” That makes me feel so much better!
Welcome to the party, Lloyd. You’re paying, right?
* I will recommence the belaboring process soon, though. I am currently doing some research for an extended post on the Hunt silver episode, and what it tells us about the efficacy–and risks–in cleared, exchange traded markets.