UPDATE 1-Nasdaq CEO sees markets turning by end of 2009
WASHINGTON, Dec 2 (Reuters) - The chief executive of NASDAQ OMX Group Inc (NDAQ.O) predicted on Tuesday that stock markets will start improving by the end of 2009, with recovery coming in the middle of 2010.
"Markets will tend to turn six months before the new economy," Robert Greifeld said at the Fortune 500 Forum. "I would be hopeful that at the end of '09 we see markets turning, recovering in mid-'10."
U.S. stock markets have been hammered in recent months, with the Nasdaq composite index losing more than 45 percent of its value this year.
Peter Peterson, the co-founder of Blackstone Group (BX.N), said it is going to take several years before capitalism returns to its prior levels.
"It's going to be longest recession I think we've had in a long time," Peterson said at the event.
Greifeld and Peterson agreed that a lack of regulation and a compensation structure that rewarded excessive risk-taking led to the global credit crisis that has dragged the U.S. economy into a recession.
Greifeld said derivatives to protect firms against currency risk, interest rate risk, and counterparty risk were completely unregulated because policymakers feared that putting restrictions on the products would send them offshore.
"These industries -- and they really are industries -- grew up without any regulation whatsoever," he said.
Compounding the problem, managers and traders were encouraged to create, sell and invest in highly risky products without considering their long-term effects.
"Both had the tendency to be pushing the short-term without asking the question: 'What if we can't unload this stuff in two or three years?'" Peterson said. "You had a combination here of a lack of regulation, greed, and very short-term incentives."
Looking at reforms, Greifeld said market participants should be paid after a transaction is completed and it is known whether the deal was good for the company.
More price discovery in the derivatives markets and a central counterparty clearing service are other crucial changes, Greifeld said. Existing stock exchanges could easily serve that purpose, he said.
A central counterparty would backstop trades by all participants, lower the risk of a failure of a single major market player, and give regulators more information.
Peterson also called for more regulation of derivatives, especially the credit default swaps (CDS) market, which has an estimated notional value of more than $50 trillion.
Central clearinghouse proposals for the U.S. market have come from the IntercontinentalExchange Inc (ICE.N), which is said to have the support of big CDS dealers, and from CME Group Inc (CME.O) and its partner hedge fund Citadel Investment Group, which say they could launch a CDS exchange as early as this month.
In Europe, Deutsche Boerse AG's (DB1Gn.DE) derivatives arm, Eurex, and NYSE Euronext (NYX.N) are vying to create central clearinghouses. (Reporting by Karey Wutkowski, editing by Gerald E. McCormick)
