U.S. Treasury Signals the Derivatives Mess Is Far From Over

It appears as if the U.S. Treasury expects a fallout in the derivatives market. Anthony Ryan, the Treasury's assistant secretary for financial markets, said on Wednesday that investors and their fiduciaries must do a better job of evaluating the risks of increasingly complex securitized derivatives products, Reuters reported.

Addressing an International Swaps and Derivatives Association [ISDA] conference in New York, Ryan reminded his audience on the differences between investing and gambling.

Insufficient understanding or failure to perform an independent and adequate due diligence prior to making an investment decision is simply unacceptable. That's not investing - that's gambling.

In clear language I assume it means something along the lines of "it is your fault when you bought illiquid crap."

According to Ryan the President's Working Group on Financial Markets, also dubbed the "Plunge Protection Team", has launched an examination of recent market turmoil, including the impact of securitization and the role of ratings agencies in credit and mortgage markets.

On Tuesday, the Treasury had asked pension fund investors and asset managers to make recommendations as to what information hedge funds should disclose to protect investors and strengthen U.S. capital markets.

Given the continuing problems in money markets where even massive doses of fresh money are of no help the real mess is probably only about to begin. Nobody has exact or even approximate figures for the current size of the derivatives market but all estimates range in the hundreds of trillions. There must be a lot of bag holders out there and right now is the time where every fund manager with pricing problems in his portfolios waits for the other ones to drop theirs first.

Such action will come as banks and funds have to dress up their balance sheets for what will certainly not be a good Q3 2007.

At the moment the market appears way too quiet for all the problems that did not get solved by the Fed's recent rate cut. And these problems are in the vast majority.

Comments

[tmmcnay]

"Hundreds of trillions"? I doubt that. One thing to keep in mind is that at the bottom of this mess is a piece of real property which sets a floor. As the REIT debacle in the past showed those with the most patience came out OK. The DOT COM bust though was a complete bust because there was nothing of value, zilch, nada! I've not yet heard that mortgages were written on phantom property. As you've noted the issue slowing the recovery is that the "smartest guys in the room" won't 'fess up.

2007 Sep 27 03:27 PM

[Russia Guy]

There is nothing behind many, if not most derivatives, other than the credit of the counterparty.

Hundreds of trillions is llikely "close."

2007 Sep 28 12:37 PM

[Russia Guy]

There is nothing behind many, if not most derivatives, other than the credit of the counterparty.

Hundreds of trillions is llikely "close."

2007 Sep 28 12:37 PM