this is a hell of a problem and it is agonisingly slow work, but the apocalyptic crises predictions are off base; LTCM actually taught us that in a genuine crisis, people act like grownups and respect the basic principle of the "banker's right of netting" even when the actual legal position is ambiguous. But swaps netting is a complete mess and it is a bit of a scandal that so little progress has been made in like seven years.
A lot of what's at the root of this problem is that financial regulation has been separated from central banking in a lot of jurisdictions, so issues like payment system integrity (which is the ultimate Cinderella issue; it is full of horrid technical acronyms and boring pedantic details that big-picture civil servants hate) tend to fall between the cracks. Since something like this is partly a regulatory issue and partly a technical issue of banking, it is very difficult to build a career out of doing it well these days and thus it is unlikely to be done well. Sometimes I think that TARGET (the trans-European real-time gross settlement system that underpins the Euro area short-term money market) may end up being the last payment system ever to be properly designed. best dd -----Original Message----- From: PEN-L list [mailto:[EMAIL PROTECTED] Behalf Of Marvin Gandall Sent: 16 February 2006 15:55 To: [email protected] Subject: Wall Street worries about swaps Below, a revealing look at the risks associated with derivatives trading, particularly the market for credit default swaps, and how the big Wall Street investment banks are scrambling to self-regulate. Haunted by the near-miss that was LCTM, the so-called "Fourteen Families" have come together in order to relieve the pressure for more state intervention from the SEC and other regulatory agencies, and in their own self-interest. The WSJ report suggests how dangerously exposed the financial system is. The huge market lacks both a modern clearing system to process trades as well as tranparency. There is a big backload of unconfirmed and legally unenforcable transactions, and borrowers "routinely turn over obligations to a third party" without the lending counterparty reportedly knowing about it. "The danger is that with no firm certain who owes what to whom, a minor hiccup might become a financial calamity with repercussions for the whole economy." - MG ------------------------------------------------ By
