muses of the moment

October 28, 2009

The Bomb has been delayed not defused

Filed under: Credit Derivatives, The Banking Crisis, The Federal Reserve, The Financial Crisis — totallygroovygirlfriday @ 9:55 am

The bomb is the derivatives market.

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Derivatives were the invisible 800-pound gorilla in the room. After accounting for them  – even abstracting from counterparty risks – leverage ratios were a multiple of those reported in the books .It was the failure of Lehman Bros that drew the attention to the ultimate implications of this huge snowball rolling down the hill .In the eve of the bankruptcy of Lehman, the International Swap and Derivatives Association (ISDA)[1][2], had to improvise an unprecedented trading session on Sunday, September 14th 2008 to enable market participants to carry out trades and offsets of derivatives; further, the effectiveness of the transactions was contingent on Lehman filing for bankruptcy by midnight.

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