IN THE PAST we have lambasted a number of the key programs of the Obama administration.

This time, he has gotten it right.

The reform of financial markets which is about to pass the Congress with key help from Republicans is the right thing to do at the right time coming only too late to have averted the monstrous financial crisis that we have just suffered.

The reform essentially, overturns laws which were passed during the Clinton administration that allowed derivatives to be traded as a security without any oversight from the SEC or anyone else. In fact, the law explicitly exempted derivatives from any oversight whatsoever and this, in turn, led to a orgy of greed and slough rarely seen since the Securities and Exchange Act was passed in 1933.

This column explained derivatives last year when everyone was wondering how the market crash could have happened and how the government ended up having to take over AIG Insurance and other firms that issued derivative contracts that were bought by the rich folks as a purely speculative venture and who made scads of money without concern for the consequences that were sure to come.

You may recall that it was all over the news last year that unregulated credit default swaps caused the financial meltdown that occurred at the end of 2008 and caused the demise of Bear Stearns, the bankruptcy of Lehman Brothers, the merger of Merrill Lynch into the Bank of America and the near bankruptcy of AIG, the insurance giant that had to be bailed out by the government to the tune of $180 billion.

How could this be we asked at the time. How could it be in this day of the Securities and Exchange Commission and the vast government regulatory system that we have that a security known as a credit default swap could completely escape scrutiny?

It was the government that caused the mess and now, it is the Congress and the President that have stepped forward to finally fix the problem.

Last fall, we gave a little history lesson on how this occurred. It is worth repeating here because though I am one who likes as little interference from government as possible, in the financial markets, it is absolutely necessary and appropriate.

Back in the late 19th century, a number of sleazy brokerage houses sprang up in New York and around the country. They eventually became known as ‘bucket shops.’

What these shops sold were bets on securities. What the customer purchased was a derivative, i.e. a credit default swap in a security or a commodity future.

However, the transaction was not done through an exchange of any kind. It was a bet made with the bucket shop.

The bettor would give a fee to the bucket shop betting that a particular security was going to go down and if it did, then the bucket shop would pay. If it didn’t within a defined time, then the bucket shop would win the bet and the bettor would lose and get nothing.

The transaction goes 'in the bucket' and is never executed, thus the term bucket shop.

Without an actual underlying transaction, the customer is betting against the bucket shop operator, not participating in the market.

The new law will correct this problem and require that all derivative transactions be through a regulated market and not on the street in a bucket shop.

Some states began banning bucket shops at the end of the 19th century. The federal government followed suit in 1908 after the panic of 1907.

Bucket shops were illegal from 1908 until 2000. Then, in the flurry to deregulate, Congress changed the law again.

The Congress passed an amendment to the securities laws stating that a credit default swap was exempt from any regulation and the federal law specifically prohibited the states from passing any law to the contrary.

It was a Republican Congress and a Democratic President, Bill Clinton, who passed this new law.

The result was a sensational give away to Wall Street investors and brokers.

Immediately, large brokerage firms started selling credit default swaps for the very first time. Insurance companies started manufacturing new derivatives in the form of insurance like policies that they could market on the street but not through the market.

The real problem was that these bets were not backed by any reserves. The purchaser of the swap relied solely on the good word and reputation of the seller of the swap.

This is also corrected in the new law which requires that firms issuing or trading derivatives must have capital reserves to guarantee that they can pay if the derivative is called.

Also, prior to the new law, the purchaser of a swap was not required to have any interest in anything that he was trying to hedge against such as our example of the neighbor insuring against the window getting broken.

Anyone could buy a swap betting on anything they wanted so long as the house would take the bet.

It was legalized gambling of the worst sort. The new law corrects this and sets capital reserve requirements and puts regular market rules in effect for all derivative transactions.

No security should be left unregulated. It seems to us that it is always an invitation to greed and speculation when there is no oversight.

The President promised during a speech at Cooper Union last week that this new law will stop the necessity of future government bail outs of financial companies.

Whether the new law will bring that promise to fruition only time will tell. To be quite frank, we doubt it. However, it certainly is a step in the right direction and we applaud the President for taking bold action.

It could not have been an easy thing for him considering that his administration is infused with Goldman Sachs former employees and Wall Street former executives from top to bottom and that his campaign accepted millions from the same companies that this law will now oversee.