 If there is virtue in
acknowledging the limits of our knowledge, then it was in abundance
two weeks ago in Sea Island, Ga., where the Federal Reserve Bank of
Atlanta held a two-day conference on the vexing risk implications
of credit derivatives. "Knowing what we don't know" may bring to
mind the oft-ridiculed statement by Donald Rumsfeld, the former
secretary of defense, that "there are things we know that we know,"
and "there are things that we now know we don't know." If Rumsfeld,
in those 2002 remarks, hadn't rambled on and into "unknown
unknowns" and such, he might have gotten credit for imparting a
kernel of useful philosophy. Suffice to say that some of the
smartest minds in the world of finance and risk management are
showing themselves to be anything but self-delusional know-it-alls
when it comes to credit derivatives, and that's a credit to them.
Credit default swaps, which have been doubling every year, stood
at $34.5 trillion in notional value outstanding at year-end 2006,
according to the International Swaps & Derivatives Association.
At least that's the benchmark that industry people most closely
follow, and it seems to ring true in the resulting trading volumes
and back-office processing burdens.
That's not the only number out there. The Bank for International
Settlements' (BIS) semiannual derivatives statistics come in
slightly lower. Michael Gibson, assistant director and sector chief
of the division of research and statistics at the Federal Reserve
Board in Washington, considers BIS more accurate "because it
adjusts for double counting of interdealer trades," he said in a
paper presented at Sea Island. The British Bankers Association's
latest, 2006 estimate is considerably lower, at $20 trillion, which
some experts suggest may be based on earlier data. Be that as it
may, the business is big and growing fast, and anything of this
nature that grows so quickly is unlikely to develop smoothly or to
be an "unalloyed good," observed Cathy Minehan, president and COO
of the Federal Reserve Bank of Boston. |
