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