THE FINANCIAL CRISIS What role have derivatives played in the financial crisis?
Although OTC derivatives markets were not responsible for the onset of the crisis, they played both a direct and an indirect role in its propagation. The direct role was epitomised by the near failure of AIG due to its dealings in the credit default swaps market. The indirect role had more to do with the participants in those markets. Bear Sterns and Lehman Brothers, two of the institutions that got swept away by the crisis were important players in the OTC derivatives markets, either as dealers or users of OTC derivatives, or both. They got into trouble due to substantial losses that originated outside the OTC derivatives markets. However, due to the central role played by these two institutions in the OTC derivatives markets and beyond, their trouble affected the entire global financial system. Hasn’t the crisis shown that OTC derivatives markets work well? At the end of the day, those markets handled the default of Lehman Brothers smoothly, closing the latter’s positions without any
