This blog looks at the implications of failed investment bank Lehman's call on their "insurance" in the form of derivatives contracts. If everyone can handle the the cash call when it comes, good; if not, maybe a domino effect - one failure unbalancing another in a chain reaction. In particular, will hedge funds , who tend to play with borrowed money, be able to honour their contracts, or will they be the weak link in the chain?Next up, says "George Washington", are the insurance and auto companies. It seems Standard & Poor's fear these could be the last days for GM and Ford.
I'm given to understand that players in derivatives usually balance their position with bets both ways; but they tend to be big bets. It's like a seesaw with an elephant at each end: if one elephant steps off, or turns out to be a baby compared to the other... What's the chances of $55 trillion of derivatives being well-balanced at all points?
So there are good reasons to think that next week is going to be more exciting than most of us would wish. Friday's Dow volatility may be repeated.
