Myth that could undermine credit derivatives

Great points on how this is "not your father's" hedge fund collapse, due to the "mark to model" practice for mortgage CDOs:

"Some will refer complacently to last year’s Amaranth collapse, where a $6bn (£3bn) loss was smoothly absorbed by the market. But Amaranth lost its shirt on natural gas futures – a highly visible and widely traded instrument. These positions could be bought out with confidence by its rivals.

"Contrast the Bear Stearns case, which triggered the latest mini-crisis. The other banks that inherited the subprime derivatives in question have held off selling them, precisely because they risk crystallising a much lower market price – which would then apply across the board.

"Recall, too, that Amaranth was able partly to offset its losses by selling a $1.3bn portfolio of leveraged loans. These were greatly in demand at the time – for packaging into credit derivatives. It might be different today."