The Quarterly Strategy Updates

Through our investment team’s top-down macroeconomic analysis, and numerous years of investing experience, Interinvest’s clients have benefited from avoiding several pitfalls in the global markets.

In the June 2004 Global Issues, entitled Derivatives are Booming, Dr. Black elucidated the market risks associated with the global banking system assuming an ever-increasing degree of leverage through complex derivative contracts, many of which are difficult to understand, let alone value.

In the July 2007 Global Issues, Dr. Black reviewed the events which led up to the collapse of two Funds managed by Bear Stearns, and raised the question of validity in regards to ratings. The issue is particularly significant as a ‘AAA’ rating on CDOs and other derivatives allows a bank or brokerage firm to secure a comparatively small amount of capital, (essentially use leverage of roughly 200:1) under the rules set forth by the Basel II accord. As ratings agencies have come under increasing pressure to review their process, and perhaps downgrade the credit ratings assigned to some of these securities, it follows that banks and brokerage firms will be required to pledge significantly more capital against these holdings, a particularly tall task in an illiquid environment.