FTFM When the concepts of Friedrich Nietzsche and Joseph Schumpeter begin to creep into a discussion about the state of the derivatives market in 2008, you start to grasp how unsettled and unreal the last 12 months has been for market makers and risk takers in these complex financial instruments. But dreaming we are not. Instead, from the credit fallout emerges a new batch of products – simpler, safer and as liquid, says the sell-side - but the verdict from investors is less absolute. Indeed, “creative destruction” is everywhere.
“What happened in the last year was a great turning point to radical change,” suggests Alberto Gallo, managing director for credit derivatives strategy at Bear Stearns, the investment bank. Mr Gallo explains that the one-way trend of investors chasing yield through their derivatives exposure “worked in a good economic environment when fundamentals were improving or stable” but he is referring to the hedonistic leveraging of five years ago. “Today, credit spreads have widened and are more volatile, leaving every excuse for further unwinding of investment positions,” he says.
