Obama wades into regulation of derivatives

Congress and the Obama administration are in the process of regulating everything that walks, talks,eats, and sleeps on Wall Street. The most recent uproar came earlier today when news began to leak out that the government may set up guidelines for compensation across a wide array of financial firms.

Now, Washington wants to regulate the derivatives market, which makes some sense. The trading in mortgage-backed securities and other exotic instruments has been blamed for everything from the collapse of the banks to the Johnstown Flood of 1889. Financial quants have developed hundreds of ways to bet on a range of instruments based on everything from equities to commodities to bonds.

According to the AP, "In a draft two-page letter to congressional leaders, the Treasury Department says it wants to create a central electronic-based system that would track the buying and selling of derivatives." Treasury also wants to monitor the liquidity of the firms trading the instruments. That value of derivatives holdings worldwide has been estimated to be in the hundreds of trillions of dollars.

As often is the case, the government is stepping in after most of the damage to companies like AIG (AIG) has been done. But, new vigilance may keep the problem from repeating itself. If the local savings bank is going to be regulated, trading in several trillions of dollars in derivatives should be, too.

Douglas A. McIntyre is an editor at 24/7 Wall St.

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