FISHER: …we have got to think harder about all the embedded leverage.
I mean it’s a little shocking that not more people understood, that if you take a 30 to 1 leverage structure product and you put it on a 30 to 1 levered balance sheet, you are not talking about 30 to 1 leverage, you are talking about 900 to 1 leverage. And you can magnify gains and losses pretty dramatically when you do that.
So, the risk management system, the capital rules just haven’t kept up with the instrument innovation, another decade has gone by.
The Bloomberg on the Economy podcasts are a priceless (fortunately free) resource. I will attempt to motivate you to download the Aug 15, 2008 interview with former Treasury Under Secretary Peter R. Fisher. The above-captioned quote is from about 8:20 in the audio. Or you can read the interview transcript here.
Fisher seems to be one of the most well-informed on the inner clockwork of the financial system — that I’ve heard anyway. Fisher left Treasury in 2004 to join asset manager Blackrock, Inc. And now he is one of the names mentioned as a candidate to take over the New York Fed from Timothy Geithner.
Unanswered question: how much of this 900:1 leverage is still in play — specifically contracts that are not adequately hedged?
Recent Comments