Levin: ‘We Ought to Eliminate the Damn Synthetics’

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Friday, April 30, 2010 at 3:12 pm

Sen. Carl Levin (D-Mich.), in an interview with The Washington Post’s Ezra Klein, says that the government should ban synthetic financial products — which allow investors to make a bet on an underlying asset or bond without actually investing in it. (For instance, see this description of synthetic collateralized debt obligations, the massive sale of and massive losses on which stoked the financial crisis.)

As far as I’m concerned, we ought to eliminate the damn synthetics. To me, they don’t serve any real purpose at all. They’re just betting on something where they don’t have a stake, they’re not hedging legitimate risk. With other things, there’s a limit. There’s a finite amount of corn and wheat and mortgages. But these synthetics have no finite limit. So you literally have a gambling hall and the bets are unlimited. I’d get rid of them, and there will be an effort to get rid of them, and I will vote for it.

Levin’s comments imply that he wants financial regulatory reform to go further than the existing Dodd and Republican plans — which do not ban financial firms from betting on risky products, so long as they have enough money to cover their losses and ensure that they do not imperil financial stability. New York Times columnist and Princeton economist Paul Krugman has agreed that regulators should “make banking boring.” Popular though Levin’s belief might be, I doubt there is the political will to so dramatically alter the bill at this late stage.

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