muses of the moment

August 31, 2012

A little humor

Filed under: Credit Derivatives — totallygroovygirlfriday @ 6:09 pm

groovygirl found this 2002 Fed paper humorous. Click here.

It is 52-pages, so if you are in a hurry, read the intro and the conclusion (page 32-33-34). This Fed paper examines if a financial crisis, like the collapse of Russia in 1998, would have a major systemic impact via the interest rate swap market in particular. Guess what the paper concludes?

groovygirl wonders if they did a paper for the collapse of Europe?

Side musing: groovygirl skimmed through the math on this one, it is not her best subject. The take-away: it is the spreads that kill you, not the real interest rates. That is why LIBOR was manipulated (up and down), to keep the spread from causing a default on the swap. (gg suspects that they still manipulate it, they have to, it’s the only option.)

Nothing has changed!!! There are more interest rate swaps now than in 2007-8 (or 1998). It is the largest portion of the global derivatives market. And it is the spread that blows the thing up, not the rate, so the Fed can not control the collapse. Even if they wanted to.

They can only bail out the damage from the aftermath. An interest rate swap is a bet. If you are betting that interest rates will go up in the next five years, who is taking the counter bet? Why would they do that? Those are the questions to ask yourself. Those are the questions government regulators should be asking themselves. Click here.

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