Wednesday, February 20, 2002

There are derivatives for everything these days, including derivative contracts which allow you to speculate on the chance that a loan to a specific company might go bad. These are called credit-protection contracts, and have a legitimate application in providing insurance for lenders who do not want to bear the entire risk of a particular loan. Using this form of derivative, you can in effect buy an insurance policy against a loan being uncollectable. If you had access to the pricing of these contracts, and in particular to changes in the pricing of these contracts, you could see that those in the know saw Enron for the disaster it has become way before the stockmarket did. This means that the information on questionable companies is available, even when the stockmarket touts continue to talk up the stock. It also means that, if the information is available in an outside financial market, it had to have been available to Enron insiders, whose dumb act is wearing a bit thin.