Skip to content

Good things?

Derivative securities can do a wide range of things. They can deal with default risk and they can deal with interest rate risk.

What did derivatives have to do with solving the S&L crisis?

Do you remember the Resolution Trust Corporation? What it did was to create pools of mortgages and slice the mortgages into various risk positions or tranches. The securities were sold to institutions depending, one would think, on their ability to handle risk and desire for higher rates. This was a great way to move the assets of failed S&Ls off the government’s books and into the private sector.

Today we find that the powers-that-be are questioning this practice, because the mortgage market has experienced more defaults than many pundits would have thought possible. So is the problem with the practice of creating derivative securities or with increasing the probability of defaults?

Share your thoughts, post a comment.

(required)
(required)

Note: HTML is allowed. Your email address will never be published.

Subscribe to comments