Citadel Investment Group head Ken Griffin believes investment firms have given far too much power to young and inexperienced traders.
"Walk across any of the trading floors — they are full of 29-year-old kids," Griffin told the New York Times.
"The capital markets of America are controlled by a bunch of right-out-of-business-school young guys who haven't really seen that much."
Griffin — who began his trading career in his Harvard dorm room and is now 40 — finds the Washington regulators who have overseen what he calls “the great depression on Wall Street” particularly irritating.
"Everyone is missing the elephant in the room," Griffin says, referring to the present lack of government oversight of credit default swaps, a business with a notional value and risk of $50 trillion.
“As an industry, we have a responsibility to manage risk in a way that is prudent.”
Add to poor regulation the fact that many financial firm CEOS only understand small parts of the businesses they oversee, and you have a surefire recipe for disaster, Griffin says.
“When you read that UBS did not even view parts of its mortgage portfolio as having market risk, it becomes very obvious that a number of firms were not dotting the i’s and crossing the t’s when it comes to risk management,” he noted at a recent conference.
“Investment banks should either choose to be regulated as banks or should arrange to conduct their affairs to not require the stop-gap support of the Federal Reserve.”
Griffin wants the government to require the use of exchanges and clearing houses with strict rules in place for credit default swaps and derivatives.
Such requirements would avoid the kind of interlocking relationships between thousands of investors and banks over credit default swaps that made it necessary for the Fed to bailout investment bank Bear Stearns.
Such exchanges and clearinghouses offer a simple, straightforward solution that would eliminate billions of dollars in exposure and remove the lack of transparency that currently benefits investment banks, which act as intermediaries.
Eliminating banks as middlemen would also make more money for Griffin’s firm.
Not everyone agrees more regulation will prevent market problems. Warren Buffett, for instance.
"People continue to do foolish things no matter what the regulation is, and they always will,” Buffett recently told students at Wharton School of Business. “There are significant limits to what regulation can accomplish.”
"It’s very, very hard to regulate when you get into very complex instruments where you’ve got hundreds of counterparties,” Buffett said.
"The counterparty behavior and risk was a big part of why the Treasury and the Fed felt that they had to move in over a weekend at Bear Stearns.”
"I think we’ve got fabulous capital markets in this country, and they get screwed up often enough to make them even more fabulous,” Buffett continued. “I mean, you don’t want a capital market that functions perfectly if you’re in my business.”
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