I saw this article in today's Globe and Mail, but the paper edition had an interesting pyramid, showing how the equity and debt markets are perched above this base of derivatives and if it has a major fissure, the stuff on top collapses with it. Also, some observations from an astute derivatives trader, Satyajit Das.
See
G&M Report on Business:
Satyajit Das is not the sort of person you want to meet after a really bad day in the markets. The renowned derivatives expert has such a gloomy outlook on the state of the world's financial system that you might have to be kept away from sharp objects after he leaves the room.
“I think this crisis has a long way to run,” the globetrotting Mr. Das said yesterday from London. “It is an extra-innings baseball game and the national anthem still hasn't finished playing. So we really don't know what the worst is.”
...
Last year, when his latest, most accessible book, Traders Guns & Money, hit the shelves, he gave a series of speeches on the coming credit crash. “People decided that either I had lost my marbles finally or I'd been smoking something awful,” he laughed.
Then the subprime market crumbled and people began taking notice of this risk assessor's convictions that the credit bubble was never sustainable.
...
“Owning debt of a bank or sovereign debt like U.S. Treasuries – in other words, assets with fixed returns – may not be very bright.”
