This is one of many failures of regulators to stay abreast of developments in the financial markets. If you want to sell stock to the public, you have to go through a lot of steps and do a lot of disclosure, and that’s for a security that is about as straightforward as you can get. So why are dodgy derivatives so much less regulated?
The other point is that I think there are really only a very few very big banks that are issuing this kind of stuff. Your ordinary run of the mill community bank isn’t in this business. We have let a few banks get too big and too complex. They are supposed to do risk analysis and have contingency plans if things go south for them, but I personally don’t have a lot of confidence in those measures. They are also passing on a hell of a lot of risk to the buyers of these things.
