John At The Center

Derivatives, Ms. Schapiro said, “allow parties to hedge and manage risk, which itself can promote capital formation.”

For some derivatives, that is true. But the generalization is not always accurate, and there needs to be consideration as to whether some derivatives deserve to exist at all.

“Simply put,” said Richard Bookstaber, one of the pioneers of financial engineering on Wall Street, “derivatives are the weapon of choice for gaming the system.”

Mr. Bookstaber wrote one of the best books about the causes of the financial crisis, “A Demon of Our Own Design,” and did so before the crisis erupted. This month, his testimony to a Senate subcommittee provided a stark lesson in the uses to which derivatives have been put.

via High and Low Finance – Derivatives Tug of War Takes Shape – NYTimes.com.