•  
• Tweet
•  
•        Print
•  
•         Track Keywords
•  
• 

By Randall Dodd, director of the Financial Policy Forum's Derivatives Study Center in Washington, D.C.: Rumors started circulating two months ago concerning the possible failure of several large hedge funds and massive losses by at least one major global bank. The source of the troubles was a free-fall in prices in the credit derivatives market that was triggered by the downgrading of GM and Ford. The financial system ended up dodging a systemic meltdown, but without proper coverage and analysis of the events there will be no lessons for policy makers to learn.

This Special Policy Brief is an attempt to put these rumors together in order to tell a coherent story. The purpose is to show how the events posed a severe threat to the stability of our financial markets and overall economy. The narrative also should help illustrate the market problems with these non-transparent markets organized around dealers with no commitment to market participants to maintain orderly and liquid markets.

During these May events, there were only rumors because this “near-systemic meltdown” – in the words of a senior representative of the securities industry – occurred in OTC derivatives markets where there are no reporting requirements and hence no real transparency.

Instead of news and facts, it was rumors that circulated. First the rumors were of one hedge fund failing, and then another….. In short, prices were free falling towards a dry lakebed of a market. Their fall ......................

To view our full article Click here