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London on Credit Derivatives:
`The Tail Is Wagging the Dog'

Aug. 8, 2007 (EIRNS)—The Lyndon LaRouche Political Action Committee (LPAC) issued the following release today.

The market in credit derivatives, the instrument created to finance Alan Greenspan's bubble, is now ten times larger than the tangible cash bonds on which they are supposed to be based. It is a case of "the tail wagging the dog" writes today's Financial Times in an analysis piece headlined "Unbound."

You've read it before here, at larouchepac.com. Now the voice of London's banking center is admitting so—further indication that the world's leading financiers have no solution to the crisis, and have decided to "let it blow."

Derivatives are bets about the performance of other financial instruments. In this case, it is Credit Default Swaps (CDS), marketable contracts which bet on the performance of corporate bonds.

This summer, a new product began to take dominance in the markets—indices based on the performance of the credit derivatives. The indices, known as iTraxx in Europe and CDX in the U.S., are traded by investors as instruments in their own right, and used to create new financial products.

"These credit derivatives indices are [now] the mainstays of the financial markets," says Tim Frost, co-founder of Cairn Capital, a London-based investment fund. Without the "lubrication" of these so-called "products", "the engine of the credit markets would have seized up weeks ago, and be belching acrid smoke," Frost told the Financial Times.

"It scares me," one British corporate treasurer was quoted by the newspaper as saying at a recent investment seminar in London. He likened the derivatives sector to the "Second Life" virtual world on the Internet, because it is almost completely detached from the real corporate world.