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« Revisiting the List of Worries | Main | Weighing the Week Ahead: New Information from Earnings »

July 09, 2010


Jason C

Is whether derivatives should be on an exchange a difficult question? Do you have a good reference for why not? When I look back to the CFMA of 2000 the arguments I see are: 1) derivative are making a lot of money don't end the party and 2) it will move to a different country if regulated. I don't see how a US company that wants a derivative on a US asset could allow the jurisdiction of the derivative contract to be a foreign country. And large OTC derivative contracts have had the implicit guarantee of the US government since LTCM fell. This implicit guarantee wouldn't exist in a foreign contract. Am I missing a good reason for keeping derivatives OTC? Do you discuss this in any earlier entries?

Sleeping With Bieniemy


I think I was about 22 when I read When Genius Failed, so likely I didn't have a good handle on the nuances anyway. I see your point. Ritholtz works that bailout nicely into his broader narrative of the history of bailouts though...and since his broader narrative is so convincing, I guess it just struck me as being a fair example.

I don't think "moral hazard" is necessarily overrated but I do think the more malicious characteristics assigned to it are overrated. It's not that everyone is lending/betting with the explicit knowledge that they can take advantage of the gov't and taxpayers if things go badly. I just think people generally have no idea how risky the loans they are making really are or how incapable they are of managing the risk.


Sleeping -- I also read that book. Two things to consider:

1) The banks involved (except for Bear) were the ones financing the "bailout" and reaping the rewards from the rebounds. It was a private market deal, albeit strong-armed by the NY Fed.

2) The ongoing question is whether we want institutions to have confidence in such lending or not.

Maybe it should go to an exchange, but the question is not an easy one. That is why I will consider it over the course of several book reviews.

Good comment!



Sleeping With Bieniemy

I have read this book and When Genius Failed (on LTCM) as well and tend to agree with Jason C's comments on the Moral Hazard point. I think it's less about the fact that LTCM partners/principals/investors suffered losses but that a lot of their counterparties/lenders that allowed them to get so leveraged got to walk away intact (scared perhaps, but intact). It seemed to falsely reinforce the idea that the current system could handle systemic risk.


The book is a complete waste of money and time (unless you like one-sided politically opinionated propaganda).

I am surprised you are not embarrassed endorsing such one sided opinionated garbage.

Jason C

Moral hazard is related to counter party risk. The banks who were counter parties with LTCM or invested in LTCM didn't loose any money. The banks lent to LTCM with no haircuts which enabled LTCM, but the banks weren't punished for this decision. There was moral hazard in the banks willingness to lend money to or enter OTC contracts with someone who might blow up. There are 2 ways to trades assets: on an exchange with clearinghouses and mark-to-market or OTC with bailouts. With LTCM we decide to adopt the latter for derivatives. Going back to your moral hazard argument and applying it to the financial crisis, is there no moral hazard issue because AIG was essentially wiped out like LTCM?

Keith Piccirillo

I really enjoyed last year's reading of "Bailout Nation", one in which AIG's Cassano took a lot of criticism.
I have recently read "Reminiscences" followed by Rogoff's "It's Different This Time".
Vacation next week and I will have to hit the local library to find the latest book on finance.


Paul - - I guess I'll have to add the annotated version to my wish list. Come to think of it, someone may have borrowed my copy.

Nice to hear from you, and thanks for your observations.


Paul Nunes in kansas City

i will have to read Jeff. I just finished the annotated "Reminiscences of a Stock Marlet Operator" and Jon Markman really did an excellent job adding background to the story. Reading histories of Wall Street and the key individuals of the time (Carnegie, Rockerfeller, JP Morgan, etc) has helped me to recognize there is nothing new on Wall Street (from Reminiscenses) and as Paul Tudor Jones stated in the interview provided in the book; it goes back to King Solomon "There is nothing new beneath the sun". I loved this line in particular from the interview; "Remember, he was known as King Solomon the Wise, not King Solomon the Clueless." For all the handwringing (justified given current conditions) cycles of fear and greed drive humanity and there is nothing we can do about it. At A Dash has been extremely helpful to look at facts in a logic and consistent manner and is a great resource. Thanks as always for efforts here jeff.

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