The former chief of the Fed Reserve has been saying since 2002 that derivatives, financial agreements used to bet on everything from bond prices to weather patterns, actually reduce risks by making financial markets resilient to shocks.
He told a Bond Market Association gathering in New York in May that derivatives are the most significant change on Wall Street in decades. At a time when oil prices are above $70 a barrel, the Mideast is exploding and more than two dozen central banks have raised interest rates since May, derivatives are allowing companies to borrow a record $607 billion and obtain relatively cheap financing.
By bundling more than 10% of that into so-called collateralized debt obligations, bankers are able to provide more cash to companies, especially those that need it the most.
Defaults fell to the lowest since 1997 as sales of CDOs rose 63% to $177 billion in the first half, according to the Bond Market Association, a trade group of dealers and underwriters. Derivatives help explain why the default rate has remained this low as long as it has, said David Hamilton of Moodys Investors Service.