Anybody who hasn’t read it might enjoy Michael Lewis’s book Liars Poker. Came out just before the creditors in John Merriwether’s hedge fund had to be bailed out, 5 or more years back.
Ought to be a cheapo at Abe Books.
Very good take on international paper traders and the culture.

Posted by: Groucho | Apr 11 2006 16:42 utc | 3

A recent rundown on the growing danger of the credit derivative market by the widely cited HCM Market Letter written by Michael Lewitt:

As the financial markets increasingly move into the realm of computer models and derivative instruments, the ramifications for the global economy and the lives we lead are only beginning to be understood. Increasing amounts of the world’s wealth are being traded indirectly rather than directly, which raises questions that governments, regulators and investors are only beginning to address. While governments still debate free trade in physical goods, the volume of intangible goods being traded without restraint grows at an exponential rate.

February 16, 2006, The Wall Street Journal “GM Debt Poses Challenge to Derivatives Market” :

The car maker has about $30 billion in debt. Traders estimate more than $200 billion in credit derivatives are linked to GM. But because such derivatives don’t trade on an exchange, nobody knows for certain how much credit default swap protection has actually been written on GM. And nobody can say with confidence that they even know who is on the other side of the trades that they have entered into.

What we have is a world-wide racetrack where bets are placed on the credit quality of major corporations. The bets’ value far exceeds the actual debts of those corporations. No “house” is keeping track of the counterparties, or guaranteeing settlement. Whether these bets can be sorted out in the event of a major default is the $64 billion dollar question that the EU is worried about.

Posted by: PeeDee | Apr 12 2006 21:47 utc | 5

@jj, damn, it sucks when jesus makes me speak in tongues, so sorry. Derivatives are contracts that pay off based on the value of specified assets: stocks, bonds, currencies, commodities, anything. Often they give you an option to buy or sell an asset at a specified price. Turns out you can extend someone an option, for a price, without losing your shirt, by holding some combination of other assets that offsets the risk you take. Financial engineering, they call it. Lucrative. Everybody’s doing it. The web of options is so thick and tangled up that if one participant goes broke, everybody gets stuck with assets (or debts) that are prone to vary wildly. This is systemic risk, the chance of a cascade of bankruptcies due to some little hiccup.
To protect themselves, options holders have short-circuited bankruptcy law with provisions in their options contracts so they can close out their options in case someone defaults. Master contracts let them net out all of their transactions. That way, if they have a thousand options outstanding, fluctuating wildly, they can tally them up as a single number, asset or liability, and walk away. That’s good for them. But instead of a court-directed insolvency that minimizes disruption and tries to save the troubled firm, you have lots of complex bilateral interactions that are difficult to predict. Maybe they conflict. Traders tell me they’ve got it covered, and they have from their own perspective, but the scariest risk is some emergent property of the market — no one trader sees it coming — like explosive oscillations in asset values or everybody pulling back at once and sucking the market dry of credit. You would hope that Europe gamed out some calamity like that; their options market is even more competitve than ours, by some measures.

Posted by: psh | Apr 13 2006 16:14 utc | 7