Posted on Apr 5, 2021, 4:18 PMUpdated Apr 5, 2021, 4:32 PM
When Warren Buffett denounced in 2002 derivative products such as ” weapons of mass destruction “, he was in fact dissecting the dangers of “total-return swaps”. These financial contracts allow bank customers to gain exposure to the performance of a security without owning it. As the subprime mortgage crisis then caused capital bonds to rise, this risk seemed under control when the Archegos affair broke. And the good resistance of the banking index shows that the markets do not fear the systemic contagion from the setbacks of Credit Suisse. So much the better, but this European operator long established on Wall Street would still have lost up to a tenth of its equity on this single client. Not only did the “Swiss finish” of Swiss regulation fail to shine, but American expertise did not prevent “regulatory arbitrage”. Certain speculative funds had only to close themselves to third parties in order to be able to enter the “family office” box and take more risks. Banks have been able to account for these derivatives as less risky loans because of the securities as collateral. And it took more than ten years after the Dodd-Frank Act for the obligation made to brokerage firms to better know their counterparties to come into force. Internal risk management remains the best defense for shareholders.
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