No single firm, especially a firm that collapsed almost two decades ago, can be the “source” of crisis of the magnitude we are witnessing. What Lipton is looking at, but cannot articulate because he does not comprehend, is the role of speculative capital.
What oiled the machinery of arbitrage was the U.S. Treasury market which the massive borrowing of the government in the 1980s institutionalized. The Treasuries provided a convenient and practical tool for simulating borrowing and lending. All one had to do was to go short or long. In a “reverse hedge,” the arbitrageur did not have to find a borrower because the largest borrower was always on the stand by, ready to provide the IOU on request. This catalytic function of the Treasury market transformed it into a critical component of the global capital markets. The debt itself became of secondary importance. In that regard, Ronald Reagan was as instrumental in the rise of speculative capital as the junk bond trader Michael Milken. Both were products of their time.That is what I wrote in The Enigma of Options. You can check it out.
