Corporate & Securities Law

Warnings About Derivatives Implosion Made In 1992

By James Eccleston

Derivatives.  Did the implosion of these financial products come as a surprise?  Or should Wall Street have known it all along?  That's the question Institutional Investor addresses in this month's issue.  In "Did II Say That?" from September 1992, the magazine states:

The market for interest rate swaps, currency swaps, options and other complex financial derivatives had grown eightfold in just four years, to a notional value of $4 trillion, when the New York Federal Reserve Bank completed a survey in which bankers admitted that they did not fully understand these financial instruments.  In "Derivatives: Just How Risky Are They?" Institutional Investor [in 1992] described the market as "a time bomb that could explode" and offered two scenarios that seem eerily prescient.  The first predicted that "derivatives trading itself could cause a major bank to fail."  The second warned that "derivatives, simply because they now invisibly permeate the entire financial system, could turn an ordinarily containable situation - one that isn't even caused by them - into a full-blown financial crisis."  The bomb did explode with the collapse of collateralized debt obligations and other mortgage-backed securities, ripping apart Wall Street and knocking out financial institutions across the U.S. and Europe.

Attorneys at SNSFE continue to investigate a plethora of abuses associated with derivatives investments.

Source:  Institutional Investor, October 2008

Full post as published by FinancialCounsel on October 31, 2008 (boomark / email).