Derivitives as power tools and skinny-dipping

by Erin McCune on September 4, 2007

in Investment Strategy

The recent financial uncertainty has prompted some eyebrow-raising metaphors in normally staid financial coverage. I'm amused.

In a weekend news analysis piece on the global financial turmoil set off by subprime mortgages, the New York Times quotes a strikingly apt analogy likening derivatives to power tools:

In the United States, regulators appear to think that the new and
often unregulated investment vehicles — which have shrunk the world and
speeded up business in much the same way as the Internet — are not all
inherently flawed.

This opinion is captured in an analogy
offered by Peter Douglas, the founder of GFIA, a hedge fund research
firm in Singapore. He likens using derivatives to power tools. If you
know how to use them, he said, they are exponentially better and faster
for building a house, compared with using hammers, screwdrivers and
handsaws.

If you don’t, “you could drill a hole in your head," he said.

I have to admit I only noticed the article because it was accompanied by a great photo of Mick Jagger from a recent performance for employees of Deutsche Bank.

On the same day, an editorial piece quoted a naked swimming analogy from Warren Buffet:

A chestnut from the investor Warren Buffett — “you only find out who is swimming naked when the tide goes out” — has been quoted a lot lately as investors learn more about excessive risk-taking by lenders, bankers, hedge funds and other investors.

There’s just one problem. The tide hasn’t gone out. The nudists identified thus far were exposed by the first round of bad news from the credit markets — among them, hedge fund managers at Bear Stearns, bankers at HSBC and a handful of other European banks and executives at Countrywide, the nation’s largest mortgage lender. In the coming months, we’ll get a better view of many others.

Read the news analysis article:

News Analysis: Why a U.S. Subprime Mortgage Crisis Is Felt Around the World
By JENNY ANDERSON and HEATHER TIMMONS
The New York Times
August 31, 2007

Read the editorial:

Editorial: The Tide Is Still Going Out
The New York Times
August 31, 2007

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