Volume 44, Number 173,
April-June 2013
Latin America. Between Financialization
and Productive Finance
Roberto Soto
DEREGULATION AND INNOVATION: THE START OF THE BIG TSUNAMI

After the collapse of Bretton Woods, financial markets became a space for renewed competition between financial and non-financial companies in the search for growing profits. The derivatives market in particular was transformed into a very important tool to generate liquidity and earnings for banks as well as non-bank financial institutions. One of the reasons behind this shift was the need for companies (both financial and non-financial as well as private and public) to achieve new means of financing, because the traditional source, which was the volume, liquidity and financial management of their reserves and all types of credit lines, had contracted. As Guillén writes, there was strong securitization due to the issuance of derivatives as economic agents became more dependent on financial markets, instead of banking credit (Guillén, 2011). To this respect, Girón and Chapoy write:

The unprecedented increase in financial products as a result of financial innovation led to financial fragility. It also inflated the real estate bubble due to strong speculation in order to obtain profit through the bonds that financed investment in this sector. To sum it up, the valuation of capital through this type of instrument, once it reached a certain level, brought about a decrease in its value and a subsequent credit contraction. In this way, the cause of current financial fragility is the crisis of structured finance, whose theoretical explanation is found in Minsky’s hypothesis (2009: 50).

To achieve this, mega-conglomerates used derivatives markets to generate new income, manage assets, liabilities and capital, and in this way obtain favorable fiscal development. We can take for example Bankers Trust, a pioneer (in 1984) in the use of interest and currency swaps, one of the most popular derivative financial instruments used today and traded in the over-the-counter (otc) market, generating revenue of 70 billion dollars, which at the time was rather significant (Soto, 2010: 125). In other words, speculative operations were producing the highest revenues, rather than traditional banking activities, such as granting credit.

The participants adapted to better innovations and sought the most qualified personnel to achieve their objectives. Among these participants are financial conglomerates such as jp Morgan Chase, with assets worth 2.29 trillion dollars and 70 trillion invested in derivatives. For non-financial conglomerates, according to the International Swaps and Derivatives Association (isda), 95% of the 500 largest companies in the world (isda, 2009) used derivative financial instruments. This point is fundamental to understanding the complexity of operations with derivative instruments. The most cutting edge accounting techniques are used (also known as creative accounting). Using dfiallows companies to hide losses, justify earnings or refinance liabilities, making the balance of companies as financial intermediaries ever more opaque, especially in the banking system.

One example of this is the case of the Barings Bank in England, which went bankrupt in 1995. Another is the company Procter & Gamble, which has reported considerable losses, or Enron, one of the largest companies in the world, which went bankrupt due to its management of derivative products and creative accounting (for more cases, see Soto, 2010). In reality, deregulation has allowed large financial and non-financial companies to obtain resources through dfi. These financial earnings generated through innovation have been distributed through all financial markets, albeit unequally, especially for the largest financial conglomerates, but also in investment funds and the coffers of large companies. Through the trade of derivatives, some financial intermediaries and corporations can earn a significant part of their revenue outside of their traditional activities (in the case of banks, granting credit). The use of these instruments also allows for the spread of risk to other types of agents, diffusing some risks to the point where they are hidden from regulators and other major participants in the market.

This situation has caused derivative products to both generate and feed the formation of speculative bubbles, due to the ability to modify the relative prices of financial and non-financial assets. This can generate waves of financial inflation (not to be confused with traditional inflation, because it refers to the increase in prices of financial assets, for example, stock market indices or share prices of a company trading in the stock market), instability and crisis. These bubbles have been an essential factor in the concentration of economic and financial activity throughout the increasingly global economic world. According to data from the unctad (2012), the growth of multinational companies is extremely significant: their profits went from 400 billion dollars in 1999 to more than 1.4 trillion dollars in 2011, while their profitability went from 4.2% to 6.6% in the same time period. In Latin America, this growth and concentration occurs in the banking sector, where Spanish banks are dominant (Santander and bbva) and whose profitability is greater than in their home country. A significant fact is the repatriation of profits, as mentioned by the eclac (2011), which grew from 20 billion dollars in 2000 to just over 80 billion dollars by 2010.

As such, this is fundamental to eliminate obstacles to development, as mentioned by Vidal:

One of the features that has characterized the expansion of multinational companies is economic concentration. As proposed by Furtado (1999), multinational companies are a key element of the dynamism of the capitalist system, but they also produce instability, drive income concentration and contribute to trends leading to the concentration and centralization of capital that characterizes accumulation (Vidal, 2007: 67).

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PROBLEMAS DEL DESARROLLO. REVISTA LATINOAMERICANA DE ECONOMÍA, Volume 49, Number 194 July-September 2018 is a quarterly publication by the Universidad Nacional Autónoma de México, Ciudad Universitaria, Coyoacán, CP 04510, México, D.F. by Instituto de Investigaciones Económicas, Circuito Mario de la Cueva, Ciudad Universitaria, Coyoacán,
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