Wednesday, 1 October 2008

What Was The Derivatives Market, Daddy?

As I have mentioned in previous entries, it is important, in these times of financial crisis, that we don't give in to gloom and despondency.

An article has come to my attention that starts with the following paragraph:

While it may look superficially similar to the recent implosions of such investment giants as Fannie Mae, Freddie Mac and Lehman, the takeover and bailout of AIG is quite different, and means that the market is entering the next and even more dangerous phase. What is driving the fall of AIG – and potential government losses that may far, far exceed the $85 billion bailout announced late on September 16th - is not mortgages or real estate (directly), but fears that AIG’s huge, global credit-default swap positions will unravel. The $62 trillion dollar credit derivatives market is 50 times the size of the subprime mortgage derivatives market, and is indeed larger than the entire global economy.

I feel that the last sentence is unnecessarily inflamatory, and I would urge everyone to make sure that they do not read the article

under any circumstances, as it provides a clear explanation of the derivatives market, and so could create panic and despondency amongst the general populace.

And whatever you do, don't let your wives, children or servants read it either. These things are far to complex for them to understand, and there is no need to worry them unnecessarily.

I know you won't let me down.

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