Zeev's Turnips Talk Politics (ZTTP)

[hawkerp]

derivatives. Thats what has allowed lending institutions to write what they do and sell their risks. They sell the loans which are then packaged often times interest stripped from principle and tied to libor rates or other instruments. The trick is for the investment bankers who write the derivative models to get AAA ratings from S&P or Moody's. The packages are then sold to large institutional buyers like state retirement funds or insurance companies. The problem is that most of this is done off the market and value at risk models vary depending on packaging and investment banking institution. Warren Buffet calls them weapons of financial destruction. For a good expose on some of this read Frank Partnoy's FIASCO and more recently Infectious Greed. He lived on Morgan Stanley's derivatives desk for years before he got scared and quit from fear of going to jail largely as a result of what was going on in with the books of bankers in Tokyo. He, too, is convinced that one day there is going to be a massive derivatives explosion, largely as a result of the "Infectious Greed" of the investment banking houses. LTCM and Enron were warmup drills.