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To: Secret_Agent_Man who wrote (177414)	7/4/2002 12:26:08 PM
From: Secret_Agent_Man	Respond to of 436258

Hedge fund manager warns of derivatives time bomb By Gary Parkinson (Filed: 03/07/2002) Tony Dye, the fund manager dubbed Dr Doom for his pessimistic outlook on stock markets during the technology boom, warned yesterday of a "lurking time bomb" of creative accounting in the derivatives market. The value of contracts in the over-the-counter derivatives market has hit $110 trillion (£72 trillion), he said, with the market now worth three times the global economy. money.telegraph.co.uk

To: Secret_Agent_Man who wrote (177414)	7/4/2002 2:44:02 PM
From: patron_anejo_por_favor	Read Replies (1) \| Respond to of 436258

Nice quote by Henry Kaufman buried in that article (which is quite good, BTW), summarizing the whole problem with current US finance and the dangers of securitization: ""The integrity of credit is being chipped away by a financial revolution that is helping to lower credit standards and muting the responsibilities of both debtors and creditors. We began moving in this direction when deposit insurance was legislated in the 1930s. This measure, generally laudable when viewed against the financial disaster of that period, removed the disciplining link between the creditor of the financial institution (that is, the depositor) and the institution itself. Increased "securitization" of credit obligations is another development that has had unfortunate consequences, as what was a "private" loan becomes part of a "public" marketable security. This further loosens the link between creditor and borrower. Credit derivatives also accomplish the same loosening. These are complicated instruments that protect a holder from the risk of default and therefore remove that risk from the lender. In a non-marketable relationship, the creditor is tied to the borrower for the life of the loan; of necessity, under these circumstances, credit scrutiny at the inception of a loan or investment is likely to be quite intensive. The same degree of credit investigation is not likely to take place when the relationship between lender and borrower is to be temporary. In a securitized arrangement, many market participants fail to distinguish between the essence of liquidity and marketability. Liquidity means being able to dispose of a financial asset at par, or close to it, while marketability provides the holder an opportunity to sell at some price. The illusion of marketability is that holders believe they will be able to sell their investments before a significant deterioration in credit quality is generally perceived. Thus the initial pressure to be highly circumspect in the creation of the obligation is absent. A world of relatively unrestrained credit growth is also encouraged by the use of credit lines and guarantees. These assurances lead investors to make commitments based on the strength of the guarantor and not on that of the borrower. The heroes of credit markets without a guardian are the daring – those who are ready and willing to exploit financial leverage, risk the loss of credit standing, and revel in the present casino-like atmosphere of the markets." – Henry Kaufman, Interest Rates, the Markets, and the New Financial World (1986). It's really that simple, folks. Kaufman is right, he just saw it happening 15 years before the implosion began in earnest.