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Howard Kramer Says So Long to the SEC

By Nina Mehta

Howard Kramer, one of the leading figures in the SEC’s regulation of the securities derivatives market, is leaving to become a partner in the Washington office of Schiff Hardin & Waite, a Chicago-based law firm. As a 16-year veteran of the SEC, Kramer’s career in the Division of Market Regulation spans much of the history of the derivatives market.

Kramer says a turning point in the market was clearly the 1987 crash, which put a damper on the growth of the market. “At that time, there was still clearly a need for derivatives, but people were scared off by the volatility, which had just spiked up, and the fact that risk management techniques weren’t fully developed,” he explains.

The SEC spent the first year after the crash trying to figure out what had happened and why. Kramer helped draft part of the agency’s study on the crash, and served as one of the staff liaisons to the Brady Commission, which was issuing its own report. “What scared us somewhat,” recalls Kramer, “was not only the crash, which was startling enough in itself, but the fact that there were a number of things in the infrastructure—the so-called plumbing of the markets—that really needed to be fixed.”

After the crash, the exchanges began a massive education campaign to rebuild investor trust and develop a smorgasbord of products. Kramer helped review and approve products such as FLEX options, long-term equity anticipation securities, index and currency warrants, various types of structured notes, and hybrid products traded on exchanges—as well as helping make sure that the right market safeguards were in place.

Kramer also worked on over-the-counter derivative issues, and when the Bankers Trust/Procter & Gamble case hit the headlines in 1994, he was brought in as an adviser by the SEC’s division of enforcement. “While most of the ’94 losses came out of not particularly well-honed risk management techniques, the BT case was different because we actually found instances of fraud,” he says. “The maelstrom arising from the 1994 losses signaled the need for parties of an OTC derivatives contract to clarify the nature of the relationship between themselves.”

In the upshot of the increased calls for additional regulation of over-the-counter derivatives, six leading U.S. broker-dealers formed the Derivatives Policy Group in order to develop a framework for voluntary oversight. As one of the senior SEC staff members working with the DPG, Kramer says he quickly recognized that “it was not a case in which the regulators were telling firms what to do. It was not an instance when you needed enforcement action. It was one in which the firms and regulators sat down together and said, ‘Here are the thorny issues. How can we best work them out in a way that’s a win-win situation?’”

Kramer says one of his biggest disappointments during his tenure at the SEC has been the amount of time taken up with jurisdictional disputes, particularly between the agency and the Commodity Futures Trading Commission. In the long run, he says, “the disputes were a real drain on both agencies. I’ve always thought it would have been beneficial to our markets and consistent with good government to have a unified agency. But ultimately that was an issue for Congress to resolve—and they’re still looking at it.”

In his new job, Kramer will advise markets and broker-dealers on compliance with federal securities regulations and represent them before the government. In shifting from the regulatory world to industry, Kramer can finally take a few moments to survey the scene. “To my mind,” he says, “the financial markets and, in particular, the derivatives markets in the United States have been a real jewel in the U.S. economy in terms of developing competitiveness and the range of products now offered.”


Letters T0 THE EDITOR

Numbers Work

Nassim Taleb’s 15 minutes of fame are up. He makes an obvious point that value-at-risk is not perfect, and a more interesting and pertinent point that academics and other pointy-heads can often get too enamored of formulas and forget that assumptions about normality and “stationarity” must be handled with care. But his pretentious sermons about scientism are tiresome. Quantification doesn’t have to be perfect to be useful. For example, SAT scores don’t truly measure a student’s ability, but they are extremely useful nonetheless, given the subjectivity of alternative measures of student ability (such as recommendations and grades). Human activity is different from that of atoms, but if you don’t believe that statistics can be applied to human behavior, you just have to look at the real-world usefulness (that is, the profitability of using, not just selling) of credit bureau scoring to see that this isn’t so.

Eric Falkenstein
senior vice president of capital
allocations, KeyCorp
efalken@ix.netcom.com

Taleb responds:
The author of this volatile letter has totally failed to understand my point. I never argued that VAR was merely imperfect (and therefore somewhat useful with some care, like SAT scores). I consider it methodologically flawed, a trap for the quantitative fool who thinks that he knows something about financial markets. The distinction is not trivial: It is the difference between conceptual error and lack of precision. In addition, I relate the weaknesses of VAR to its dependence on the properties of time series, which makes the comparison to credit bureaus and SAT scores (inherently cross-sectional) rather strange on the part of someone employed in the markets.

Nassim Taleb
Ntaleb@ix.netcom.com

Brokers in Trouble

I’d like to compliment you on the observations found in your recent article on interdealer brokers [“Squeezing the Brokers,” May]. As an interbank broker for the past 20 years, I have seen the market go through many changes, always toward expansion and new products. But for the past four years there has been a significant decrease in brokered over-the-counter and structured products.

In addition, recent developments in global price dissemination by various news and communication networks have all but eliminated the interbank broker, who, in the advent of these markets, provided liquidity to the market by getting customers to put prices “on the boards”—that is, the foreign exchange market. Unfortunately, I fear that exchange-type contracts on swaps, repos and swaptions may accelerate your time horizon for the market and add to its demise.

Frank Filice
vice president,
Tullett & Tokyo

ERRATA
The final phrase in the interview with Christine Cumming (June) was cut off because of a printing error. The final sentence should read: “That avenue may provide another set of answers that could help us in finding that process.”
The graph used in the article “Adapting RiskMetrics to the Euro” (Shorts, June) was taken from the JP Morgan/Reuters RiskMetrics Monitor. Readers can find the article on which the story was based at www.jpmorgan.com /RiskManagement/RiskMetrics/pubs.asp.


Briefly
  • Swiss Re New Markets has announced a number of new appointments. Mark S. Starr has been named director of the firm’s London global capital markets unit. He had been managing director and head of global investment advisory at Chase’s asset management group in Europe and Asia. James Olivo, head of Swiss Re’s capital markets team, has been named principal. Hans Hefti has been named principal and head of the risk services unit. He previously served in the corporate integrated risk management office of Swiss Reinsurance Co.
  • Nicholas A. Giordano, former CEO of the Philadelphia Stock Exchange, has been appointed interim president of La Salle University. Giordano retired from the PHLX in 1997.
  • NumeriX has hired Mark Shornick as chief financial officer and Guang Yang as a quantitative analyst. Shornick had served as CFO of Measurement Specialties in New Jersey and Yang had been vice president of quantitative research at Open Link Financial.

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