Boosting debt bets could lead to a repeat of 2008 financial crisis, CMG Capital Management Group CEO Steve Blumenthal tells Bloomberg. Derivatives that helped inflate the 2007 credit bubble are being remade for a new generation, writes in Bloomberg yesterday. The story, titled JPMorgan Joins Goldman in Designing Derivatives for a New Generation, quotes industry insiders, including CMG CEO Blumenthal.
The emergence of new derivatives is reminiscent to the period leading up to the (2008) crisis. “Wall Street has always had a habit of piling on products when there’s an appetite for the asset class,” Blumenthal told Bloomberg. Excerpt from the story:
The riskiest kind of derivatives added to losses for investors during the credit crisis. The investments included so-called synthetic CDOs that during 2006 and 2007 loaded their holdings with credit swaps linked to the debt of financial companies including Lehman, Washington Mutual Inc. and bond insurer Ambac Financial Group Inc., all of which collapsed amid the 2008 market seizure.
“You didn’t know the depths of the risk you really had,” Blumenthal said of the subprime paper rolled up into AAA-rated products. “We might not be there yet but we are in a frothy environment today.”
Former Fed Chairman Paul Volcker has blamed credit swaps and CDOs for taking the financial system “to the brink of disaster.” See the full story in Bloomberg JPMorgan Joins Goldman in Designing Derivatives for a New Generation