Stark warnings from the likes of then–Federal Reserve Bank of New York president E. Gerald Corrigan helped to fuel fears about the fast-growing derivatives market, whose notional value had reached $4 trillion when Institutional Investor published its September 1992 cover story, “Why Derivatives Rattle the Regulators.” Among the issues raised in that article were concerns that “a flawed hedging model” might mean that “a firm [would] have a large exposure and not even know it.” Other experts worried that a liquidity drought might make it impossible for dealers to execute hedges when they most needed to. These concerns were echoed this past summer when Wall Street’s proprietary models failed to predict the consequences of the subprime mortgage meltdown and dealers and other investors found hedges either impossible to put on or too expensive. The consolation we offered to readers at the time: “Lending money to shopping mall developers or trading mortgage-backed bonds — to take just two examples — are actually more dangerous than dealing in derivatives.”
