John Meriwether, founder of Long-Term Capital Management LP, recently made a revealing comment about derivatives, and the stability of the financial markets.
In another publication, he remarked: "The hurricane is not more or less likely to hit because more hurricane insurance has been written. In the financial markets this is not true. The more people write financial insurance, the more likely it is that a disaster will happen, because the people who know you have sold the insurance can make it happen. So you have to monitor what other people are doing."
This new risk could give the market anxiety. Derivatives serve many useful purposes, in the right hands. Pension fund executives ought to review the vulnerability of their managers. They might ask also: What does John Meriwether know about markets?
