World Economic News
New Warnings About the Danger of a Derivatives Blowout
Under the headline "More Scrutiny for Derivatives" the Financial Times reported on plans for a Sept. 27 meeting of U.S. and European bankers in New York, to address back-office logjams and other risks in their privately negotiated or over-the-counter derivatives operations. "Regulators' growing scrutiny of the increasingly important global derivatives markets underlines concerns that operational shortcomings at dealers or their trading partnersoften hedge fundscould heighten the risk of widespread market failures and fraud," the FT wrote. "At a meeting with leading derivatives dealer banks, the Federal Reserve Bank of New York and other national regulators will broaden discussions with the dealersa group now expanded from 14 to 16beyond credit derivatives into other products including equity derivatives, according to bankers." The Times reports that recently Jerry Corrigan and New York Federal Reserve Bank chairman Timothy Geithner have expressed concern about derivatives dealers', i.e., banks' lending practices for hedge funds.
Similarly, the German weekly Der Spiegel comments, in "The Trillion Bomb," that the collapse of the Amaranth hedge fund "is only one among many since the 1998 spectacular collapse of LTCM." According Spiegel, hedge fund and derivatives speculation has increased more and more dramatically since then, while anxiety at the IMF and European Central Bank is growing. What is happening right now, writes Spiegel, is a threat to the world financial system. The danger goes beyond Amaranth. In May 2005, after GM's credit rating was downgraded, the credit derivatives market almost underwent a meltdown.
And Frankfurter Allgemeine Zeitung, Germany's financial center daily, warns of the debacle which the collapse of Amaranth could yet have on the world financial system.
Bloomberg Sept. 25 reported that the major losers known so far in the Amaranth collapse are Geneva-based Union Bancaire Privée, San Diego County's retirement fund, Bermuda-based insurer Max Re Capital Ltd., Arden Asset Management in New York, and the pension fund of 3M Co. headquartered in St. Paul, Minnesota. Funds managed by Goldman Sachs, Morgan Stanley, Credit Suisse Group and Deutsche Bank AG, also had money with Amaranth.