| sep 28 2008 | | Hank's Flip-Flop | Hank Paulson this past July assured us that "It's a safe banking system, a sound banking system. Our regulators are on top of it. This is a very manageable situation."
He also lectured Chinese officials in March of last year, "The reality of the situation is that an open, competitive, and liberalized financial market can effectively allocate scarce resources in a manner that promotes stability and prosperity far better than governmental intervention..."
One of the liberalised financial market instruments is the OTC derivative markets.
The OTC derivative market is the largest market for derivatives, and is unregulated. 10 years ago it was just over $50 billion According to the Bank for International Settlements, the total outstanding notional amount is $675 trillion. Of this total notional amount, 66% are interest rate contracts, 10% are credit default swaps (CDS), 9% are foreign exchange contracts, 2% are commodity contracts, 1% are equity contracts, and 12% are other. OTC derivatives are largely subject to counter party risk, as the validity of a contract depends on the counter party's solvency and ability to honor its obligations.
Hank is looking very scared with each appearance on TV telling us that the last crisis is behind us and all is well. How many times is that now Hank?
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