“More generally, the 2008 credit crunch was never related to worries over traded derivatives; it was — like all credit crunches — related to much more general worries over bank solvency and the quality of banks’ balance sheets.” Felix Salmon
The claim that the 2008 crises were not related to worries over traded derivatives is simply wrong. And I write this post to present some of the considerable evidence against this claim. (That said, I agree with Felix Salmon’s critique of this article that the Greek default is not a good example of CDS-generated systemic risk.)
First, William Dudley the President of the New York Federal Reserve Bank has stated publicly that: “The novation of OTC derivatives was an important factor behind the liquidity crises at both Bear Stearns and Lehman Brothers.”
Novation takes place when, for example, a hedge fund decides that it doesn’t want to face Bear Stearns as a counterparty and therefore transfers the contract from Bear Stearns in order to face JP Morgan Chase. In the process any collateral the hedge fund has posted to Bear Stearns must be transferred to JP Morgan Chase.
Read more: http://syntheticassets.wordpress.com/2012/03/02/the-role-of-derivatives-in-the-2008-crisis/
The claim that the 2008 crises were not related to worries over traded derivatives is simply wrong. And I write this post to present some of the considerable evidence against this claim. (That said, I agree with Felix Salmon’s critique of this article that the Greek default is not a good example of CDS-generated systemic risk.)
First, William Dudley the President of the New York Federal Reserve Bank has stated publicly that: “The novation of OTC derivatives was an important factor behind the liquidity crises at both Bear Stearns and Lehman Brothers.”
Novation takes place when, for example, a hedge fund decides that it doesn’t want to face Bear Stearns as a counterparty and therefore transfers the contract from Bear Stearns in order to face JP Morgan Chase. In the process any collateral the hedge fund has posted to Bear Stearns must be transferred to JP Morgan Chase.
Read more: http://syntheticassets.wordpress.com/2012/03/02/the-role-of-derivatives-in-the-2008-crisis/
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