Flashback

In the March 2007 issue of Portfolio, Jesse Eisenger warned that companies were exposed to much bigger losses than was generally understood thanks to the nature of the derivatives market:

Derivatives are vulnerable to problems because the accounting is complex and they can add much more leverage to the system than investors realize. For derivatives to become dangerous, they need complacency.

That’s exactly what’s going on today. In February, a presidential panel led by Treasury Secretary Henry Paulson said hedge funds—among the heaviest users of derivatives—should remain lightly regulated. And the European Union’s chief market regulator similarly declared that no extra private equity regulations were needed. So, sure, derivatives aren’t inherently evil. But in the hands of overmatched regulators and blithe investors, they will be.

Heck of a job, Hank?