Tags: munger | ban | derivatives

Charlie Munger: Ban All Derivatives

Thursday, 16 Oct 2008 01:02 PM

By Julie Crawshaw

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Warren Buffett colleague Charlie Munger has some very definite ideas about what needs to happen in capital markets now.

First, Munger wants a complete ban on all derivatives contracts.

Munger told Forbes magazine that an investment firm should "be a market maker, a broker, an underwriter and a custodian of securities but not the hedge funds they have become."

Munger also wants to bulldoze the options exchanges in Chicago and New York, reduce Wall Street balance sheets by 70 percent and restrict leverage to 50 percent on every securities transaction, except for the Treasury trading desk.

Fifty percent is the maximum margin level that ordinary investors can obtain from their brokers when purchasing common stock.

Prior to collapse, both Bear Stearns and Lehman Brothers were leveraged to $30 of debt for every $1 of capital.

Meanwhile, Sen. Tom Harkin (D-IA) is proposing legislation that will force many derivative financial products, credit-default swaps included, to be regulated on exchanges.

"There's too much undercover stuff going on in the financial markets," Harkin says.

In 2000, a united financial services industry persuaded Congress to permit a vast, unregulated derivatives market.

Harkin wants to change that “so that we know who, how much, what the values are, and that they have to answer a call once or twice a day to make sure they have got the money to back it up," Harkin told CNN Money.

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