For over ten years prior to bringing down of AIG by derivates and the release of financial panic that reverberated across the globe, professor Lyn Stout was one of the lone voices giving out dire warnings of the tsunami ahead. His first missile was published in Journal of Corporate Law, 1995. It seems none had bothered to read it.

Following the collapse of Wall Street in 2009 Congress is now at last sitting up and trying to chalk out a legislation to place controls on the unregulated market that runs into $592 trillions for over the counter derivatives.
The House Financial Services Committee is pouring over a bill that is planned to bring the shady world of derivates into the open where the investors can see for themselves all that is happening and so that the regulators can put brakes prior to the breaking out of any crisis.

The House Agriculture Committee is mulling over its individual version and Senator Jack Reed (Democrat) has penned a draft that will be taken up for debate in the Senate.
The legislation part is included in a wider programme to revamp the financial regulatory system following the implosion in Wall Street a year previously. To many viewers the main war will be over derivatives. So far these have been gold mines for the mega financial entities like Citigroup and Goldman Sachs. But for others it was the reverse. The failure of the sub-prime mortgages turned into an international financial hysteria.

Christopher Whalen of Institutional Risk Analytics said, “OTC derivatives are at the heart of the crisis.” Derivatives are derived from some underlying assets like corporate bonds, foreign currency or commodities like oil. Some are dealt like stocks on the Chicago Mercantile Exchange or other similar exchanges. But others known as OTC (over-the-counter) are privately negotiated between the dealers of derivatives and their customers. The dealers of derivatives earn more on customized deals than on the standardized contracts that are traded on the exchanges or pass through the clearing houses.
The derivatives could by used by the business concerns on Main Street to hedge risks. For example a factory in USA selling items to Europe may enter into a derivative deal to safeguard against the fall in value of the euro. It is a game. The investor bets that the euro will increase and this is matched by a bet that the euro will drop.

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