Every time something bad happens, derivatives get blamed. You'd think subversives were using them to take over the world.
No recent non-political topic that I know of has inspired more hyperbole.
Based on recent press reports, the current media definition sometimes seems to be, a derivatives transaction is any financial transaction in which a large amount of money is lost.'"
They've cut back on some plans to expand amusement parks.
Investors have already found fault with some companies for failing to derivate' - a verb jokingly created by J. Peter Grace, Chairman of W. R. Grace & Company.
...despite the panic, the derivatives crisis is largely a news media invention.
Top management, whether corporate or otherwise, failed to understand the nature of the products being used in their treasuries or trading operations.
A couple of the people who were in the core places within Barings that should have been administering a high level of control ...had what I would describe as almost no understanding of the fundamentals of the business.
Nick Leeson, whom most of you know and all of you have heard of, runs our operation in Singapore, which I want you all to emulate.
The recovery in profitability has been amazing following the reorganization, leaving Barings to conclude that it was actually not all that terribly difficult to make money in the securities business.
Management was second-rate at best ... They had no concept of the words risk and management going together, for instance. The place was becoming unraveled.
Apologies, Nick.
...there is little argument about who was derivatives technology salesman of 1995. Most people agree that Nick Leeson did more than anyone to raise the awareness of the need for firm-wide risk management.
Q: What's the difference between O. J. Simpson and Nick Leeson? A: O. J. knew when to cut his losses.
There is a tendency to paraphrase the NRA [and say that derivatives don't kill people, people kill people.'] but the bodies are piling up now and it's wearing a little thin.
A derivative is anything that made a loss in 1994.
All I did as a trader was lose the assets of my own corporation.
There will always be a conservative unit trust manager who will use it [Barings' collapse] as ammunition to continue to fight against using derivatives. But I think the market sentiment is that derivatives are here to stay and that it is advantageous to one's basket of portfolios to use them.
Any derivative that made it through last year's trial by fire must be pretty benign.
It is childish to say, after the event, I didn't understand what I was doing.'
Robert Citron's strategy to notch up the leverage - and, in happier times, the yield - on a pool of investment funds under his control will earn him a place in the U.S. derivatives hall of fame.
The year was 1994, and as U.S. interest rates reversed direction upward, investors everywhere scurried to cover their assets. Some weren't fast enough and a new media star was born - the derivatives monster.'
Singapore should quit focussing on traders who chew gum and don't flush toilets and watch those who falsely trade futures accounts and bring down banks.
Of late, each time a market participant suffers a large, newsworthy loss, the term derivatives' is used almost as if it were the explanation. In fact, risk market strategies, such as borrowing short to invest long, have been around for a long time, while the term derivatives' or even swaps' are more recent coinages. In the Orange County case, the losses were not caused by over-the-counter contracts that market practitioners normally consider derivatives.
...most legislative groups just don't want any part of [derivative investment] because it puts a crimp into their political futures if something goes wrong.
I've seen things in the market where I scratch my head and can't imagine why people did it. For example, when P&G lost all that money, I couldn't fathom what anyone at that company was thinking when they looked at that formula of the swap and said, Yes, that's exactly what I want to put on.'
It's not a major event unless you lose a billion dollars.
It's like the story of the three blind guys standing next to the elephant and trying to figure out what it is. The first grabs the tail and thinks it's a snake; the second leans up against it and thinks it's wall, the third grabs the trunk and thinks it's a tree branch. They don't have anything close to an elephant. That's what we have here with L[ong] T[erm] C[apital] M[anagement].
L[ong] T[erm] C[capital] M[anagement] is like what happened with Lloyd's [of London] a few years ago. The risks were misunderstood, and risk-takers not properly informed. But Lloyd's didn't remove the rationale for reinsurance. Likewise LTCM doesn't invalidate the role played by hedge funds.
It seems LTCM could have survived one Nobel prize-winner, but with two, they
were doomed.
Frederic Townsend
Futures, December 2000, p. 75
'We've had a serious markdown,' Meriwether advised him, 'but everything's fine with us.'
Roger Lowenstein
When Genius Failed: The Rise and Fall of Long-Term Capital
Management
New York: Random House, 2000, p. 147
Blaming LTCM's crisis on leverage is like attributing a plane crash to the fact that the aircraft was no longer safely in contact with the ground: it identifies the source of overall vulnerability but not the specific cause.
Donald MacKenzie
"Long-Term Capital Management and the Sociology of Arbitrage"
Economy and Society, 32 (August, 2003), 349-380 (p. 360).
Last updated: January 9, 2011