FYI: Innovative financial instruments contribute to every financial crisis.
Portfolio insurance, the practice of using dynamic hedging to limit losses, played a big part in the 1987 crash. High-yield and emerging-market debt, leveraged private-equity transactions and hedge funds have all had central roles in upheavals, as have securitization, including CDOs, and various derivatives.
In the next crisis, familiar instruments – chiefly risky debt and derivatives, either rebranded or modified – will be prominent. There are record levels of high-yield and emerging-market (some of it now labeled “frontier market”) debt outstanding. Volumes in private equity (once called leveraged buyouts) are high. Securitization and CDOs have re-emerged, including subprime transactions in auto loans.
Regards,
Ted
https://www.bloomberg.com/view/articles/2018-05-09/wmd-old-and-new-primed-for-a-market-meltdown?srnd=etfcenter
