Saturday, August 11, 2007

The derivatives vacuum

The only perfect hedge is in a Japan­ese garden.

I wonder how the "We protect against all losses through hedging" guys are doing.

This commentary is by Frank Partnoy at the Financial Times:

...Then came the whopper: on July 18, Bear Stearns admitted it could not figure out how much money it had lost. It said: “A team at BSAM [Bear Stearns Asset Management] has been working diligently to calculate the 2007 month-end performance for both May and June for the funds.” The funds refused to answer investors’ questions. Less than two weeks later, they filed for bankruptcy protection....

...This is not the first time smart people have bought complex derivatives and later said they could not calculate their losses. Bankers Trust, the most sophisticated derivatives firm of the 1990s, made similar mistakes. In 2001, the chief executive of American Express shocked investors when he admitted the company “did not comprehend the risk” when it lost $826m on CDOs. Freddie Mac and Fannie Mae have taken years to value derivatives losses, as did Enron.