Wednesday, August 22, 2007

Credit Derivative Orgy is Behind Liquidity Crisis

The Fastow Economy by Martha Rosenberg

Financial Times warned against them. So did Warren Buffet, Alan Greenspan, Jim Sinclair and the chief economist at Morgan Stanley.

Derivatives they said could facilitate a global financial collapse like what sunk Barings Bank, Orange County and the Long-Term Capital Management practically overnight.

(And did a number on Chase Manhattan, Bankers Trust, American Express and Barclays Capital.)

Sure banks and financial institutions love the structured investment vehicles--especially collateralized debt obligations (CDOs)--because they let them get loan risk off balance sheet and take on more lending. And they can hold them at cost without recording losses or marking to market--or so accounting rules indicate.

Sure the rich like the cyber-constructs as tax dodges in their Cayman Islands registered hedge funds.

Sure traders love their leverage power--kind of like investor crack--which exceeds any position they could take in the cash markets....

More from Counterpunch