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Pastimes : Clown-Free Zone... sorry, no clowns allowed
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To: reaper who wrote (145016)1/21/2002 12:55:45 PM
From: GraceZ  Read Replies (2) of 436258
 
The biggest difference between ENE and all those names you mentioned is that in ENE's case the derivatives that were used to offset risk all came back to Enron, there was no third party. This was both good and bad. It was what contributed to the collapse in the first place but it also kept the collapse from becoming a systemic collapse.

When you use derivatives to offset risk it doesn't really lower the risk it simply spreads it out over lots of other entities. If the failure is big enough its enough to effect the market value of like vehicles such as in the risk LTCM would have posed by dumping their assets on the market all at once. The "good" thing about the ENE debacle is that while it probably put energy futures trading back 20 years and plenty of third parties lost money, it was relatively self contained, there was not a well established market with like vehicles.

Likewise, PVN didn't present a systemic risk because the risk was spread. It would take numerous simultaneous PVNs to create a systemic banking risk. I don't rule out that it could happen but then even when we saw huge numbers of banks going bust in the 80s during the S&L debacle it still remained at a size that was a rounding error in the GDP.
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