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Special Policy Brief 26 Rumors and News: Credit Derivatives Trigger Near System Meltdown Randall Dodd, Director Financial Policy Forum August 5, 2005 Rumors started circulating two months ago concerning the possible failure of several large hedge funds and massive losses by at least one major global bank. The source of the troubles was a free-fall in prices in the credit derivatives market that was triggered by the downgrading of GM and Ford. The financial system ended up dodging a systemic meltdown, but without proper coverage and analysis of the events there will be no lessons for policy makers to learn. This Special Policy Brief is an attempt to put these rumors together in order to tell a coherent story. The purpose is to show how the events posed a severe threat to the stability of our financial markets and overall economy. The narrative also should help illustrate the market problems with these non-transparent markets organized around dealers with no commitment to market participants to maintain orderly and liquid markets. During these May events, there were only rumors because this “near-systemic meltdown” – in the words of a senior representative of the securities industry – occurred in OTC derivatives markets where there are no reporting requirements and hence no real transparency. Instead of news and facts, it was rumors that circulated. First the rumors were of one hedge fund failing, and then another. As the New York Times (May 12, 2005) put it, “One firm that was the subject of rumors was Highbridge Capital Management.” Highbridge, which manages a reported $7 billion in hedge fund investments, had to send out a reassuring letter to investors denying the rumors. GLG Partners – a London hedge fund owned by Lehman Brothers known to have suffered enormous losses – was also the subject of such rumors. More alarming were rumors that Deutsche Bank had lost $500 million on its own account from trading in credit derivatives and that it faced further losses through a default from its prime broker relationship with an unnamed hedge fund – its stock slid 3% as a result. Kim Rupert, analyst at Action Economics, put it this way, "There could be pretty substantial problems given the size of the moves… At this point we`re trying to figure out whether this is just the tip of the iceberg and how big this iceberg may be."[1] A few journalists cautiously reported this, but were constrained by the lack of factual information and flat denials or refusals to comment by those targeted by the rumors. Being long rumors and short facts is not the basis for sound journalism. And it is made all the more acute because so few journalists feel comfortable talking about the intricacies of derivatives markets and especially credit derivatives. http://www.financialpolicy.org/fpfspb26.htm |
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| aus der Diskussion: | Die Aktie, die noch keiner haben will |
| Autor (Datum des Eintrages): | peter.wedemeier1 (19.08.05 17:54:06) |
| Beitrag: | 148 von 237 (ID:17618528) |
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