David Swensen, of Yale University Endowment investment management fame discusses the current state of the market and derivatives trading. Swensen is credited with the invention of derivatives now commonly referred to as "swaps."
Kim Clark from US News and World Report writes today:
The Wall Street trader who invented the swap says he's dismayed by how other traders have so abused his invention and the "complete and utter failure" of regulators to prevent the abuse that led to the current financial meltdown.
David Swensen, now the legendary manager of Yale University's endowment funds, says swaps and other financial derivatives ought to be traded on an exchange and hedge funds that get big enough to pose risks to the financial system should be regulated.
"I don't think it is the tool that is the problem," he says of swaps. "I think it is the fact that our regulatory authorities aren't doing their jobs" that allowed derivative trading to balloon dangerously. The bursting of that balloon is one of the main reasons for the Wall Street credit crunch.
In the late 1970s, David Swensen took his new Yale doctorate in economics to Wall Street. While working for Salomon Bros. in the early 1980s, he figured out a way for IBM and the World Bank to trade, or swap, payments in different currencies. It was a key development in a larger Wall Street trend to create and trade new financial "derivatives"--or instruments whose value is derived from an underlying asset or income stream. As a part of this trend, musician David Bowie found investors willing to pay him upfront cash in return for the right to collect future earnings on his hit songs, for example. And an entire industry arose to create and trade derivatives based on the mortgage payments of homeowners.
/Read more...
