In the wake of Alan Greenspan's warnings about derivatives and risk management last week -- duly covered by Brad DeLong and by The Prudent Investor -- the Financial Times has this report (available to subscribers):
Speaking to the Financial Times, Timothy Geithner said: "The growth of credit derivatives and other forms of risk transfer seem to have made the system more stable. But these gains may have come at the price of increasing uncertainty and potential losses if we end up in the 'tail' " - a bankers' term to describe the chance of a statistically rare event occurring...
The Fed president stressed he did not see a shock on the horizon. In recent speeches he has emphasised that the US financial system appears healthy.
However, his comments come as regulators and bankers are scrambling to understand the potential risks posed by structured credit products, particularly since these have proliferated at a time when interest rates are so low that investors may have become complacent.
Mr Geithner said: "It is hard to motivate people to buy more insurance against adverse outcomes when the risks seem remote and hard to measure and when present conditions seem favourable."