Market to set price for settling $500 billion in contracts
SIFMA GLOBAL SMARTBRIEF | 10/06/2008
Through a series of auctions due to be completed today, the credit derivatives market will determine the price — known as the recovery value — for as much as $500 billion in Fannie Mae- and Freddie Mac-related contracts. “The operational risks of having [the biggest auctions ever] in an extremely risk-averse market lead us to think that recoveries may be lower than the market expects,” said a Citi analyst. Financial Times (10/05)
If we look at today’s global environment we see a relatively high performance system driven by real-time global markets and rapid technological progress. Its performance explains why it is spreading so quickly. However, it is also moderately unstable. In our drive towards higher levels of performance we pursued a path of rampant global interconnectivity that has quickly outpaced our ability to dampen excess. The old dampening functions of borders, distance, government, etc are quickly fading. The result is a system vulnerable to rogue feedback. Even a small amount of it can cause global reverberations….
This conclusion also calls into question the efficacy of the idea that merely increasing connectivity is an answer to our problems. Increasing connectivity too fast, in a system without intrinsic dampening or control systems that work, will only accelerate the chaos (human nature doesn’t change as fast as technology)…. Also, the complexity of this system puts the lie to the idea that we know how to actively dampen its behavior through centralized systems of control. We neither have the scale nor the collective intelligence to pull it off. The only real solution rests on redesigning the system itself, to enable it to become more tolerant of rogue feedback…
