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Location: Georgia Southern University, Georgia, United States

Sunday, October 02, 2005

Boom Towns

Didier Cossin, Harvard educated UBS Professor of Banking and Finance at IMD in Switzerland and one of the world's experts on leading-edge financial technology, remarked in a story appearing in the Belgian business newspaper De Tijd*, “...every financial innovation is associated with scandals. Think of Michael Milken for junk bonds, Metallgesellschaft for oil futures, Procter & Gamble for currency swaps, Barings for shares futures, the list goes on. As a result of these scandals, checks are tightened up and no one now denies the benefit of, say, futures or junk bonds. Perhaps we need a few scandals in credit derivatives for them to gain acceptance."

The professor's point is well taken, but the notion of "scandals" doesn't capture the essence of the financial innovation environment. A more apt analogy is the frontier boom town. The boom town would spring up virtually overnight to exploit the discovery of riches for the taking. The boom town was a rough and tumble place, a place where the usual rules didn't apply and the law hadn't caught up yet, a place for prospectors, gamblers, rowdies and thieves. Today's financial boom towns are springing up in cyberspace to exploit a different kind of riches for the taking. But the frontier elements remain. What ultimately brings financial innovations into the mainstream is not a scandal per se, but for the frontier to be tamed - for "decent folk" to show up and feel safe.

*17 May 2005, De Tijd, Written by Kurt VANSTEELAND

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