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Greece crisis bolsters calls for regulation

The same instruments that hobbled AIG concealed Greece's mounting debt problems.

Papandreou said he got a sympathetic ear from Obama. He might also take comfort in knowing that the head of the Commodity Futures Trading Commission in the U.S., Gary Gensler, has become a believer in bringing regulation to the derivatives market, where deals are unregulated and privately arranged.

“We must now bring comprehensive reform to the over-the-counter derivatives market. Effective reform cannot be accomplished by any nation alone. It will require a comprehensive, international response. With the significant majority of the worldwide OTC derivatives market being conducted in the U.S. and Europe, the effectiveness of reform depends on our ability to cooperate and find general consensus on this much needed regulation,” said Gensler in a speech March 18 at a Chatham House conference on financial regulation in London.

However, 18 months after near collapse of the U.S. economy and ongoing debt crises in Europe, the U.S. Congress has not settled on the terms of broad financial reform. Current discussion centers on legislation introduced by Sen. Chris Dodd (D-Conn.), which is being picked apart by lobbyists.

The crisis in Greece, and the revelation that Goldman Sachs Group Inc., beginning in 2000, sold Athens on cross-currency swaps that made its debt appear smaller, has focused European countries on how to shore up Greece’s economy.

European finance ministers meetings in Brussels recently decided on a standby lending arrangement for Greece, but there is much criticism and unhappiness over Greece’s profligate spending. The European Union also is actively working on the banning of speculative trading in credit-default swaps where only legitimate investors could hedge against defaults by borrowing nations.

Gensler, noting that is it is unclear how such a ban would technically work, is pushing for forcing sellers of derivatives, like banks, to trade on public exchanges and have enough capital to cover a “credit event.”

Greece, meanwhile, is concentrating on spending cuts, tax increases, and selling more bonds since it is not likely to get an AIG-style bailout from its eurozone counterparts no matter how tragic its future looks. The only thing certain about the future is this: No country is alone, and no regulatory prescription in one country is enough.