tag:blogger.com,1999:blog-27951078.post5313166040616360547..comments2024-02-02T05:45:33.724-06:00Comments on Incoming: John Phippshttp://www.blogger.com/profile/03245790061133614986noreply@blogger.comBlogger2125tag:blogger.com,1999:blog-27951078.post-53308491240118830122008-03-30T14:19:00.000-06:002008-03-30T14:19:00.000-06:00kirk:I too have been entranced by the idea of "let...kirk:<BR/><BR/>I too have been entranced by the idea of "letting the market go" and "letting the chips fall where they may", but we never do, do we? Besides, my guess is greater transparency coupled with recent market action will scare the bejabbers out of potential derivative-product investors right now. I sometimes think they secretly enjoyed not knowing how deep the water was.<BR/><BR/>Free traders always invoke at the beginning a policy of suffering the consequences, but my take-away from Bear Stearns is they know they never will have to (completely, anyway). The government always steps in to stop the hemorrhaging that could lead to much bigger problems.<BR/><BR/>This strikes me as an economist dream in the face of history and reality. <BR/><BR/>I'm struggling to imagine what a fixed limit on the number of contracts would do to trading...<BR/><BR/>Nope - can't get around it yet.John Phippshttps://www.blogger.com/profile/03245790061133614986noreply@blogger.comtag:blogger.com,1999:blog-27951078.post-39133247539949845712008-03-30T13:59:00.000-06:002008-03-30T13:59:00.000-06:00I would imagine there is a lot of overlap between ...I would imagine there is a lot of overlap between Wall and LaSalle. I read Bookstaber's book with great interest last summer as the Bear Stearns hedge fund woes began to unfold in mid-June and followed closely since then the ensuing deleveraging and far-reaching impacts.<BR/><BR/>There are many parallels. Credit was bid up (spreads very tight) as new market participants wanted exposure and Wall Street created it synthetically. The good news with derivatives is there are two sides to the trade with a net gain/loss of zero. The bad news is this can distort the price from the fundamentals when a large demand force steps in without a natural fundamental supply force. Instead the supply force comes from speculators. When the large demand abates and worse, they want out, that large force is reversed quickly and sometimes painfully.<BR/><BR/>I don't believe it is the instruments themselves that are the problem (puts, calls, futures, swaps) but rather knowing the current positions and type of investors holding them relative to the fundamentals and the resulting volatility and price trends. For the over-the-counter world that is currently very difficult information to get, but recent proposals have been made for changing that (PWG recommendations announced 3/13). For exchange-traded contracts you have the COT, which was expanded a couple years ago to capture the 'commodity index participants'. At least a start.<BR/><BR/>Another problem in credit was that after the exposure was created to satisfy the investors, the Street wasn't able to lay off all the risk. In effect they were the other side of the trade on super senior tranches with large amounts of leverage and not enough capital backing the trades to withstand a stressed event. In commodities, while exposure is being created synthetically for the Exchange Traded Funds or Notes, I don't believe the intermediaries are retaining that risk. Instead they are laying it off and bidding up prices in the futures market. When the investors want out those futures contracts will have to be reversed.<BR/><BR/>Two thoughts to perhaps bound the range of solutions - either limit the amount of synthetic exposure relative to some multiple of the physical underlying (the extreme being a multiple of 0) or increase the transparancy and let the market go.Anonymousnoreply@blogger.com