Swapping Places

In my youth, a swap was a way for the big kids to cheat the little kids out of their favorite marbles. When I first got into banking, it was a way for big banks to “help” the smaller banks manage their risk.

Not that much has changed.

Eventually, the money-center banks made markets swapping currencies, credit risk, and most everything else. If you can measure it, you can swap it. The bigger the market, the better for the market-makers. By charging a spread between bid and offer, the dealers make money on the deal-flow, just like a casino.

Only, in securities markets things like fiduciary duty and professional standards apply. Dealers can’t willingly help someone mask his true financial condition. Pleading “everyone does it” is no excuse, as your grandmother could tell you. Just because a transaction is legal and can generate a 7% margin doesn’t make it right.

Swaps have generated financial interconnections that have benefitted the global economy on average, but at the price of increased volatility. They need to be transparent, and they need better regulation.

Otherwise, they’re just more marbles for playground bullies.

Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!

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