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Leverage, Derivatives And Dog Food: How Wall St. Screwed Up

Following my post on the makings of the financial crisis, some folks noted that I didn’t really discuss the issues of leverage and derivatives, and how they ended up screwing up Wall Street something fierce — as, instead, I focused much more simply on the issue of “risk” and sort of swept those details under the rug. I’d been intending to tackle the subject this week, but it looks like Andy Kessler has already done the job for me, with an excellent description of how Wall Street went from helping people trade stocks into a bunch of cowboy hedge fund traders who didn’t even realize what they were trading, but knew they were making tons of money — so they kept borrowing to do more of it. They got suckered by their own dog food and ate until they became seriously overstuffed.

Still, those profits weren’t enough. Their customers [...]

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