Flashback
In the March 2007 issue of Portfolio, Jesse Eisenger warned that companies were exposed to much bigger losses than was generally understood thanks to the nature of the derivatives market:
Derivatives are vulnerable to problems because the accounting is complex and they can add much more leverage to the system than investors realize. For derivatives to become dangerous, they need complacency.
That’s exactly what’s going on today. In February, a presidential panel led by Treasury Secretary Henry Paulson said hedge funds—among the heaviest users of derivatives—should remain lightly regulated. And the European Union’s chief market regulator similarly declared that no extra private equity regulations were needed. So, sure, derivatives aren’t inherently evil. But in the hands of overmatched regulators and blithe investors, they will be.
Heck of a job, Hank?
25 Responses to “Flashback”
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October 21st, 2008 at 2:21 pm
Wouldn’t it be “Heck of a job, Pauley?
October 21st, 2008 at 2:38 pm
Heck of a job, Hank?
But if Matt knew what he was talking about, he’d realize that it was highly-regulated banks and insurance companies that took massive losses on derivatives, not hedge funds or private equity.
October 21st, 2008 at 2:40 pm
love the foreign policy and political blogging, but please stop the economy posts. Let me see if I follow the logic–derivatives are a contributing factor to the economic mess, hedge funds use derivatives, there was some proposal to regulate hedge funds that Paulson opposed, therefore, whatever that regulation was (Matt doesn’t say), it of course would have helped avoid this mess, because regulation is good? Whatever the merits of the proposed regulation, it really wasn’t related to this mess.
October 21st, 2008 at 3:09 pm
Sure, why should there be any regulations regarding a shadow market several times bigger than America’s GDP? Since there isn’t adequate public accounting of the instruments, sensible capitalists will look askance at investing in such things.
October 21st, 2008 at 3:48 pm
Bear Stearns and others were part of the ahadow banking system which was significantly less regulated than banks. Roubini has been over this (and how it led to the current and continuing economic troubles) many, many times.
October 21st, 2008 at 4:53 pm
You should actually read the article, which quotes Jim Grant: “Credit default swaps and other derivatives are neither inherently good nor bad but desirable or undesirable at a price.” The term derivative is so broad that it’s a useless descriptor. An oil future is a derivative. So are interest rate swaps. So are credit default swaps. So are options, etc…. The problem at AIG, for example, (not a hede fund!) was they wrote credit default swaps (i.e. insurance) on bonds linked to mortage-backed securities. They insured too much risky debt and at too low a price, and a lot the debt began to default. Nothing complicated about that.
October 21st, 2008 at 9:23 pm
And now those lightly regulated hedge funds are the only ones buying the toxic mortgages from heavily regulated banks (okay, fine, so are a handful of money managers).
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