Fed's rescue halted a derivatives Chernobyl

[antigop]

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/03/23/ccfed123.xml&page=1

We may never know for sure whether the Federal Reserve's rescue of Bear Stearns averted a seizure of the $516 trillion derivatives system, the ultimate Chernobyl for global finance.

"If the Fed had not stepped in, we would have had pandemonium," said James Melcher, president of the New York hedge fund Balestra Capital.

"There was the risk of a total meltdown at the beginning of last week. I don't think most people have any idea how bad this chain could have been, and I am still not sure the Fed can maintain the solvency of the US banking system."

All through early March the frontline players had watched in horror as Bear Stearns came under assault and then shrivelled into nothing as its $17bn reserve cushion vanished.

Check out this quote:

"We've been worried for a long time there would be nobody to pay on the other side of our contracts, so we took profits early and got out of everything. The Greenspan policies that led to this have been the most irresponsible episode the world has ever seen," he said.

[Pale Blue Dot]

1. There have been a LOT of quotes blaming Greenspan lately.

While I certainly agree, I see a coordinated effort to make someone the scapegoat. Which to me means that those "in the know" know that it's about to get a whole lot worse.

[gravity]

2. I place the blame on greed

If people are 100% rational, there is no need for regulation in the system.

The problem is that when times are good, bankers and investors become greedy and take excess risks without realizing it. Now the risk are becoming apparent, these champions are free markets realize why the other security markets needed regulations in the first place.