The Paradox of Derivatives
Purportedly, Warren Buffet has described derivatives traded in financial markets as "weapons of mass destruction" and, funny enough, even George Soros has warned that derivatives "will destroy society". On the other hand, there are also huge fans of derivatives, not least those Wall Street firms living on (and dying of ) these mysterious financial inventions.
Even in the aftermath of all financial casualties in the current wake of the systematic defaults of mass credit risks, no doubt exacerbated by the multiply leveraged derivatives, the avid readers of "The Economist" can still readily find articles defending the (ideal and imagined) virtues of high finance - that the securitization process spreads credit risks and helps allocate financial resources within an economy efficiently. And "firms and investors in developing countries also need the risk-sharing derivatives developed by Anglo-Saxon finance!"
Indeed anyone who thinks this financial debacle the deathbed of Wall Street will certainly be wrong - one investment bank's demise will simply be another's fortune. History is flushed with financial fiasco. Remember this book - F.I.A.S.C.O. - published 10 years ago and written by a young man who worked briefly in Morgan Stanley before he quited for a tranquil academic life and smugly exposed the ugliness of high finance in his bestseller. Apparently, huge losses in derivatives trading were already commonplace over a decade ago, and shockingly incurred by reputable insurance companies, mutual and pension funds, even global conglomerates whose core businesses had nothing to do with derivatives trading at all (and the US Orange County).
But even the blown-up 10 years ago of Long Term Capital Investment, the Connecticut hedge fund founded by two Nobel laureates - one of whom purportedly proclaimed that "derivatives have made the world a safer place" - seems a mere sideshow to the main stage of huge money games.
I am simply intrigued by the knowledge (and, as an inference, also my ignorance) of financial magic, but in no pretense of righteousness. As a matter of logic, if one has to pass judgment on the games in high finance, one needs to do it to all kinds of gambling big and small. Where to draw the line?
Even in the aftermath of all financial casualties in the current wake of the systematic defaults of mass credit risks, no doubt exacerbated by the multiply leveraged derivatives, the avid readers of "The Economist" can still readily find articles defending the (ideal and imagined) virtues of high finance - that the securitization process spreads credit risks and helps allocate financial resources within an economy efficiently. And "firms and investors in developing countries also need the risk-sharing derivatives developed by Anglo-Saxon finance!"
Indeed anyone who thinks this financial debacle the deathbed of Wall Street will certainly be wrong - one investment bank's demise will simply be another's fortune. History is flushed with financial fiasco. Remember this book - F.I.A.S.C.O. - published 10 years ago and written by a young man who worked briefly in Morgan Stanley before he quited for a tranquil academic life and smugly exposed the ugliness of high finance in his bestseller. Apparently, huge losses in derivatives trading were already commonplace over a decade ago, and shockingly incurred by reputable insurance companies, mutual and pension funds, even global conglomerates whose core businesses had nothing to do with derivatives trading at all (and the US Orange County).
But even the blown-up 10 years ago of Long Term Capital Investment, the Connecticut hedge fund founded by two Nobel laureates - one of whom purportedly proclaimed that "derivatives have made the world a safer place" - seems a mere sideshow to the main stage of huge money games.
I am simply intrigued by the knowledge (and, as an inference, also my ignorance) of financial magic, but in no pretense of righteousness. As a matter of logic, if one has to pass judgment on the games in high finance, one needs to do it to all kinds of gambling big and small. Where to draw the line?
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